Target misses the mark in Q2, shares slide

The news shaping the markets today

India and China have expressed interest to attend a multi-nation military exercise scheduled to take place in Russia later this month. The US dollar index traded almost flat this morning.

Russia’s producer prices rose by 6.1% year-over-year in July, following an 11.3% increase in the prior month. This being the lowest producer inflation since December 2020 sent the RUB/USD pair higher in forex trading this morning.

Australia’s unemployment rate fell to a new record low of 3.4% in July, versus the consensus estimate of 3.5%, which lent support to the AUD/USD forex pair.

Ireland’s KBC Bank consumer sentiment index fell to 53.4 in August, from 53.7 a month ago. Although the index fell to its lowest level in 22 months, the EUR/USD pair rose slightly in forex trading this morning.

The Philippines reported a rise in its retail price index by 3.5% year-over-year in April, compared to a 2.7% increase a month ago. Although the country recorded the highest retail inflation since October 2018, the PHP/USD forex pair remained elevated after the news.

What’s happening: Shares of Target Corporation fell on Wednesday, after the retailer reported downbeat results for its second quarter.

What happened: Several retailers in the US have recently issued profit warnings, with higher prices of products impacting customer spending on non-essentials.

Despite the hit in the second quarter, Target reaffirmed its forecast for one of its important metrics for the second half of the year.

How were the results: The Minneapolis, Minnesota-based company reported some growth in sales for its second quarter, but both top- and bottom-line figures missed market views.

• Revenues rose 3.5% year-over-year to $26.04 billion, but missed the consensus estimate of $26.09 billion.
• Adjusted earnings came in at 39 cents per share, down 89% from the year-ago period and short of Street expectations of 73 cents per share.

Why it matters: Investors were particularly disappointed with Target’s earnings, as it followed Walmart’s better-than-expected results. Although both Target and Walmart recorded sales growth, this has been driven by inflation, with margins under significant pressure due to higher discounting to clear inventories.

Target’s comparable sales rose 2.6% during the quarter, following 8.9% growth in the previous year. However, the figure came short of analyst expectations of 2.8%. The company’s gross margins shrank by 890 basis points to 21.5% amid inventory impairments, while operating income fell 87% to $321 million.

Target lowered its inventory exposure in the discretionary category of products and announced investments in frequency category products. In the second quarter, the company’s inventory surged 36% year-over-year despite heavy discounts, although this was lower than the 43% jump recorded in the first quarter.

Management guided to revenue growth in the low- to mid-single-digit range for fiscal 2022. The company also reaffirmed its outlook for operating income of around 6% of sales for the second half of the year.

How shares responded: Target’s shares fell 2.7% to close at $175.34 on Wednesday, following the release of quarterly results. The stock has declined around 24% year to date.

What to watch: Investors will keep an eye on the company’s inventory levels and the impact of clearance on gross margins.

The markets today

Crude oil will be in focus today after recording gains on Wednesday

Context: Oil futures settled higher for the first time in four sessions on Wednesday, following the release of the EIA’s (Energy Information Administration) data on crude stockpiles.

Details: Oil prices have fallen sharply from their 14-year highs reached in March, following Russia’s invasion of Ukraine.

Crude oil also came under pressure on Monday as disappointing economic reports from China raised concerns over energy demand ahead.

Investor sentiment for oil was supported by data on US stockpiles released on Wednesday. The EIA said that US crude inventories had shrunk by 7.1 million barrels in the week ended August 12, compared to expectations of a decline of 1.7 million barrels. The API (American Petroleum Institute) on Tuesday had reported a decline of 448,000 barrels in US crude stockpiles in the week.

Gasoline supplies fell 4.6 million barrels, while distillate stockpiles rose by 800,000 barrels last week, according to the EIA.

WTI crude for September gained $1.58, or 1.8%, to close at $88.11 per barrel on the NYMEX, after recording losses in each of the prior three sessions. October Brent crude added $1.31, or 1.4%, to settle at $93.65 per barrel on ICE Futures Europe.

In other energy trading, September gasoline gained 1.2% to $2.9345 a gallon, with September heating oil adding 3.9% to reach $3.6174 a gallon. September natural gas fell 0.9% to $9.244 per million British thermal units, after closing at its strongest level since August 2008 in the prior session.

What to watch: Traders await the release of the EIA’s data on natural gas stockpiles today. Working gas held in storage facilities in the US, which had risen by 44 billion cubic feet in the week ending August 5, is expected to increase by 34 billion cubic feet in the latest week.

Other Markets: European trading indices closed lower on Wednesday, with the FTSE 100, DAX 40, CAC 40 and STOXX Europe 600 down by 0.27%, 2.04%, 0.97% and 0.91%, respectively.

Support & resistances for today

Market snapshot

What else to watch today

Spain’s balance of trade, Eurozone’s construction output, consumer prices and consumer price index, Turkey’s total motor vehicles production, foreign exchange reserves and Central Bank of Turkey’s interest rate decision, South Africa’s building plans passed, Canada’s raw materials prices, producer prices and raw materials price index, US initial jobless claims, Philadelphia Fed manufacturing index, continuing jobless claims, existing home sales, as well as China’s foreign direct investment.