Target stock is a ‘buy’ after lower-than-expected Q2 profit: Analyst

Target Corporation (NYSE: TGT) is in the red on Wednesday after the retail behemoth reported lower-than-expected profit for its fiscal second quarter.

Should you buy Target stock after Q2 results?

Target says its gross margin contracted from 30.4% to 21.5% this quarter on higher markdowns.

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Increased headcount in distribution centres, higher pay for workers, and costs related to managing excess inventory weighed on margins as well. Still, Cowen’s Oliver Chen said on CNBC’s “Squawk on the Street”:

Name of the game in retail is to take markdowns quickly and with agility. They’re very decisive in doing this. It was exceptionally painful to the gross margin but that positions Target much better for the second half.

He recommends that you buy Target stock here as it has upside to $190. For the full financial year, the discount retailer reiterated its guidance for low-to-mid-single digit increase (percentage) in revenue – roughly in line with expectations. Chen added:

We’re seeing a stable consumer with spending power being very discriminating. Consumers love these treasure hunts with value being a key focus area. So, taking these inventory actions early is prudent in cleaning up this inventory quickly.

At 14 times, “TGT”, he noted, is an inexpensive stock versus Walmart at 20 times.

Notable figures in Target Q2 earnings report

• Net income printed at $183 million versus the year-ago $1.82 billion
• Per-share earnings tanked to 39 cents from last year’s $3.65
• Adjusted for one-time items, EPS came in at 39 cents
• Revenue went up 3.5% on a year-over-year basis to $26.04 billion
• Consensus was 79 cents of adjusted EPS on $26.03 billion in revenue
• Comparable sales increased 2.6%, missing the consensus by 0.2%

The discount retailer ended the quarter with $15.32 billion worth of inventory, up 1.5% sequentially, as per the earnings press release.

Target stock is currently down 30% from its year-to-date high. According to Oliver Chen:

What’s great about Target? Expect more, pay less. This brand ethos is merchandising in private label. Target has lots of phenomenal private label brands that are about a third of its business. They can offer very sharp prices to customers.

He also likes Target Corp as a “reopening” play.