Target Earnings: Margins Improve, but Sales Suffer From Pullback in Discretionary Categories

No-moat Target delivered mixed second-quarter results, as the retailer showed encouraging margin improvement but faced top-line pressure in its discretionary product categories. Against a precarious economic backdrop, the retailer reduced its 2023 earnings per share guidance to $7.00-$8.00 from $7.75-$8.75 and expects full-year comparable sales to fall by a mid-single-digit percentage. Encouragingly, Target's inventory levels continued to normalize, with inventory in discretionary product categories down 25% compared with the prior year, reducing the need for significant promotional destocking. Nonetheless, we are lowering our fair value estimate to $139 per share from $141 to account for the more pronounced pullback in near-term expectations.