Target Stock News and Forecast: TGT shares dive on call for 2% Q2 operating margins

Target (TGT) stock crashed more than 7% on Tuesday to $148 after the big-box retailer reduced its earnings guidance due to heavy inventory concerns. This is the second time in recent weeks where Target has been the center of attention for negative guidance. On May 18, TGT shares dropped from $215 to near $161 after the company's earnings results were tainted by margin erosion due to inflation. The company, long a darling of Wall Street, had the most concerning earnings and guidance results last month and led to a general market distrust of the retail sector. 

Also read: Apple Stock Deep Dive: AAPL price target at $100 on falling 2023 revenues

Target Stock News: Strategy of discounts

After losing about 25% in the session following its posting of a 28% earnings miss on May 17, Target launched a strategy of sorts to figure out how to turn its business around. That strategy, released Tuesday morning, calls for "a set of actions to right-size its inventory for the balance of the year and create additional flexibility to focus on serving guests in a rapidly changing environment."

This makes sense as Target closed out the quarter ending in April with inventory up 43% YoY. This was partly a result of heavy demand during the pandemic lockdown period for personal electronics, home furnishings and the like. Now that inflation has set it, consumers are shifting their spending toward necessities like food, shelter and energy.

In order to right-size the inventory, Target plans on introducing a series of markdowns and canceling orders with suppliers. In the statement, management also promised "the addition of incremental holding capacity near US ports to add flexibility and speed in the portions of the supply chain most affected by external volatility; pricing actions to address the impact of unusually high transportation and fuel costs; and working with suppliers to shorten distances and lead times in the supply chain."

"While these decisions will result in additional costs in the second quarter, we're confident this rapid response will pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond," said Brian Cornell, Target's chairman and CEO.

The company said these changes would mean a razor-thin 2% operating margin in the present quarter (fiscal Q2 2023) but that it would lead to a 6% operating margin in the second half of the year. Target reiterated that it expects low to mid-single-digit revenue growth this year.

Target Stock Forecast: Support is close at $150, $143

Luckily for shareholders, and Target has many long-term institutional shareholders, support now seems close by. With TGT shares opening at $148 on Tuesday and then trending higher from there (now at $153 at the time of writing), it is good to know that support from October 2020 sits at $150.72. Just a bit below there, another round of support comes into play at $143.73 for TGT stock. These two regions should be somewhat difficult to break below and are likely to be levels where institutional investors come in to buy more shares.

While the Moving Average Convergence Divergence (MACD) indicator is trending down at a steep angle and shows no signs of letting up, a somewhat better sign is that the Relative Strength Index (RSI) is stubbornly refusing to drop below 30 and remains just above oversold territory. Further consolidation in this zone may build the base for a move higher once the market processes Target's corporate strategy for dealing with heavy inventory.

TGT weekly chart