Target Shares Soar 18% as Third-Quarter Earnings Blow Past Expectations

Target (TGT) shares gained 18% Wednesday after the big-box retailer posted earnings that blew past analysts' expectations, as a reduction in costs offset continued declines in sales as consumers cut back on discretionary spending.

Net income surged 36% from a year ago to $971 million, or $2.10 per share. That was above the high end of the company's guidance range, and well above the consensus analysts' estimate. Despite this, revenue fell 4.2% from the year-ago quarter to $25.4 billion, driven by a 4.9% decline in comparable store sales.

Persistently weak discretionary spending has taken a toll on retail spending. Target isn't the only retailer to be affected by a spending slowdown, with companies ranging from Home Depot (HD) to Foot Locker (FL) also at the mercy of cost-conscious shoppers.

Speaking during a conference call with analysts Wednesday, Target Chief Executive Officer Brian Cornell said that "consumers have been remarkably resilient." However, factors such as "higher interest rates, the resumption of student loan repayments, increased credit card debt, and reduced savings rates have left them with less discretionary income, forcing them to make trade-offs in their family budgets."

Target said that strong spending in "frequency" categories such as beauty products helped offset the decline in discretionary spending. Revenue from same-day services, which includes pickup and delivery, rose 8% from the same quarter last year.

Target's operating income margin was 5.2% in the third quarter, up from 3.9% a year earlier. Margins benefited from lower costs related to markdowns, inventory, freight and supply chain, the company said in a press release.

For the fourth quarter, the retailer projects adjusted EPS in a range of $1.90 to $2.60, and a likely mid-single digit decline in comparable store sales.

Despite the sharp increase for Target shares on Wednesday, the stock is still down 14% so far this year. They've far underperformed the broader S&P 500 Consumer Discretionary sector, which is up by roughly a third so far this year.