Proactive Investors - Analysts at UBS believe the controversy over Target Corporation (NYSE:TGT)'s annual Pride Month collection will impact its second quarter financial results which are being released before the market opens on Wednesday, August 16.
In May, some employees of the retailer were threatened in response to the Pride Month merchandise which resulted in Target withdrawing several items from locations in the southern United States and online and relocating its Pride displays from the entrance of some stores to the back.
“The disruptions relating to the controversy likely impacted its top-line results and will present a near-term hurdle but we think this is well known by the market,” the UBS analysts wrote in a note to clients.
They forecast that the disruptions related to the controversy translated into comparison declines in the negative high single-digit range to end the quarter, in addition to impacting the guest experience.
However, they noted that Target has dealt with similar disruptions in the past and bounced back.
“For instance, Target’s 2013 data breach resulted in a negative low single-digit percentage comparison decline in the quarter corresponding with the breach,” they wrote.
They added that they found that Target’s next 12-month price-to-earnings multiple was largely unscathed following the disruption.
“This quarter is likely to weigh on the company’s near-term outlook but probably does not provide much evidence to prove or disprove what TGT's long-term margin will be. Thus, it will be important to hear how the factors that will influence its margin are trending, like mix and shrink,” they wrote.
The market will also be focused on how much progress the retailer has made on its $2 billion to $3 billion in cost savings and when this benefit will accrue, the analysts pointed out.
“Overall, we think TGT has the means to recover from these near-term headwinds and ultimately get back to executing its strategy to plan,” the analysts concluded.
“Plus, our findings show that TGT's recent category performance remains largely in line with broader retail sales data, even absent a pharmacy offering.”
Analysts forecast caution post-controversy
The analysts wrote that they expect Target will take a more cautious stance on its full-year 2023 expectations when it hands down its 2Q results.
“We think TGT will take this opportunity to reset expectations for the year to a range that limits further downside revisions given it is still likely working through the near-term impacts from the controversy,” they wrote.
“It will probably lower its adjusted EPS to a range closer to $7.00 to $7.50 for the 2023 financial year (versus $7.75 to $8.75 currently).”
For 2Q, they forecast earnings per share (EPS) of $0.97, below Target’s guidance of $1.30 and the consensus analyst expectation of $1.57.
The UBS analyst awarded Target stock a ‘Buy’ rating a $184 price target, based on 18 times their 2024 calendar year EPS estimate.
Target shares traded hands at US$126 on Tuesday afternoon.