Target gained $9 billion in market cap after earnings

That’s giving analysts hope that the retailer has turned the corner after several difficult quarters, as consumer spending mounts a cautious recovery. Target’s improving—although still not growing—revenue numbers and profits that far exceeded expectations could make this earnings report a turning point.  

“Target is a good company that has had a bad year,” Michael Baker, an analyst at D.A. Davidson, told Fortune. 

On its Wednesday earnings call Target reported $25.4 billion in revenue, a 4.2% decline compared to the third quarter of last year. Comparable sales, meaning sales for stores that have been open for at least a year, were down 4.9% for the quarter. 

However, analysts and investors took solace in the fact that Target’s declines were lower than expected, taking the numbers as a sign of an impending turnaround. Also reassuring was that declines were lower than they’d been in previous quarters

“Same-store sales, while negative, aren’t getting worse,” Baker says. “In fact, they were a little bit better this quarter than the previous quarter, and even a little bit better than the expectations,” he said. “Maybe the bottom is in, in terms of the sales, all while the profitability is much better than expected.” 

In the third quarter, operating income was up 28.9% for a total of $1.3 billion, a significant outperformance compared to analysts’ forecasts of $1 billion in operating income and a decline of 1% from the  year before. Target was well ahead of its annual forecast for operating income. The company reached its goal of improving operating income by $1 billion compared to 2022 a quarter ahead of schedule, CEO Brian Cornell said on the earnings call. 

But despite this week’s surge, Target’s stock is still down 15% from the start of the year. Much of the earlier stock drops were due to inflation, which peaked last summer at 9.1%, and declined steadily throughout June of this year. Consumer spending plunged during those months, decimating retail businesses along with it. “Consumers are feeling the weight of multiple economic pressures and discretionary retail has borne the brunt of this weight for many quarters now,” Target’s chief growth officer Christina Hennington said. 

As inflation eased in the third quarter, staying around a more palatable 3.2%, consumers picked up their discretionary spending, albeit not at previous levels. 

“As we’ve said, a lower inflation rate is welcome news as it will reduce pressure on consumer budgets, making room for them to expand back into discretionary categories over time,” Hennington said. 

With inflation on track to fall further, Target’s business should continue to rebound, Baker says. “You’re starting to see consumers work back into some of those more discretionary products.” 

Target’s own cost-trimming helped boost sales

Target’s net earnings, which also accounts for interest and taxes, were especially strong in the third quarter rising 36.3% to $971 million. The higher profits came from significantly improved margin rates of 27.4%, a 2.5 percentage point improvement compared to 2022, Target chief financial officer Michael Fiddelke said on the investor call. Although much of that improvement may have been because Target had struggled last year, according to Sucharita Kodali, a retail analyst at Forrester.  

“Earnings went up because they said that they did a better job managing markdowns and inventory, but they did a particularly bad job last year, so in comparison to last time, these numbers were good,” she said.  

Target’s profitability was also aided by supply chain costs that were significantly lower compared to a year ago, when they were exorbitant across the globe. The company also managed to reduce “shrinkage,” the financial term for losses attributable to waste or theft. In Target’s case, theft has been a particularly acute headwind. In September, Target announced it was closing nine stores around the country because organized theft had made them unsafe for employees. The ongoing thefts had forced Target to lock up some of its merchandise behind glass cases. When asked by CNBC if Target had lost any sales because of customers who became fed up with waiting for an employee to unlock the cases that stored items, Cornell said, “What we hear from the guests is a big thank you, because we are in stock with the brands that they need when they’re shopping in our stores.” 

The downsides of the shoplifting crisis the company is facing have already been factored into Target’s stock, Baker says, meaning pending drastic developments it won’t be a factor in further stock declines. “Now analysts and investors know it,” Baker says. “It’s not a new story.” 

Target’s third quarter performance shows the retailer has “started to get their arms around” the problem, he adds. They’ve also gotten help from policymakers. Nine states passed legislation meant to address organized retail theft so far this year. While the National Retail Federation, the industry’s trade organization, is working with a group of senators to pass a bill meant to crack down on this specific form of shoplifting. 

Despite the favorable trends, though, Target isn’t quite out of the woods yet. It’s still forecasting a sales decline for the fourth quarter of this year in the mid-single digits, although Cornell said the company was looking further down the road than just the immediate quarter. “We’re playing the long game, investing in our stores, our team, our digital capabilities, and our assortment,” he said.