Struggling throughout this year due to severe macroeconomic headwinds, big-box retailer Target (NYSE:TGT) may enjoy a reprieve thanks to inflation data that came in lighter than expected. For embattled stakeholders of TGT stock, the news offered a positive backdrop ahead of the underlying company’s midweek earnings disclosure.
According to information provided by TipRanks, Wall Street anticipates that Target will deliver adjusted earnings per share of $2.16 for its third quarter. This tally would represent a year-over-year decline of 29%. Management’s efforts to correct its excessive inventory dilemma along with increased freight and other costs will likely weigh on Q3 profitability. On the revenue front, analysts project Target to ring up $26.4 billion, reflecting growth of nearly 3%.
In Q2, the retailer posted EPS of 39 cents, down a staggering 89% YOY. At the time, analysts anticipated that Target would post 72 cents. For revenue, the metric increased 3.5% against the year-ago level. Still, the markdowns associated with clearing excess inventory dominated the narrative for TGT stock.
Providing a less-than-encouraging take, Deutsche Bank analyst Krisztina Katai stated, “We believe TGT’s print will at best be in line, combined with a likely 4Q guidance cut given softer discretionary demand trends and what appear to be ongoing clearing activity at the retailer.”
Still, Katai maintained a “buy” rating on TGT stock. However, the analyst lowered the price target to $183 from $193.
The Fed Provides an Awkward Partner for TGT Stock
From a broader perspective, the better-than-expected consumer price index reflected that inflation came in under expectations. Ordinarily, this dynamic should be positive for TGT stock. As Zacks pointed out, “Profits in Q2 fell by more than 90% as the company was forced to sell the excess inventory at steep discounts.” Therefore, reduced inflation should go a long way to address Target’s woes.
On the other hand, the reason why the equities market at large bounced on the latest inflation report centered on speculation that the Federal Reserve will lighten up on its hawkish monetary policy. If so, prices might not drop as significantly, leading to sustained elevated prices relative to historic norms.
Of course, if the Fed tightens the money supply too aggressively, such an action could spark a recession. This too would not be helpful for TGT stock, putting the underlying company in an awkward position.
Ultimately, then, Target’s Q3 earnings report may represent a litmus test for the consumer economy. If the company posts decent results, it might signal that consumers have reached an equilibrium point regarding inflation. However, if Target underperforms again, it might reflect deeper concerns with the broader retail ecosystem.
One thing’s for sure: Target is under immense pressure, which might make TGT stock too exciting for risk-averse investors.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.