Target's Earnings Weigh on SPY

The retailer said inventory challenges should be temporary.

Inventory challenges are impacting U.S. retailers and are in part driving down the price of some of the most well-known exchange-traded funds.  

Target Corp. reported weaker-than-expected second-quarter earnings Wednesday as the retailer’s profit margin declined. Deep discounts at the retailer lowered adjusted earnings to 39 cents per share—a massive drop of 89% from the same period last year—and falling well below Wall Street analysts’ consensus forecast of 72 cents per share. 

Shares of Target fell by 2.8% after market close, while the SPDR S&P 500 ETF Trust (SPY), which has the largest exposure to Target, with 4.98 million shares, declined by 0.71%. 

Two other ETFs also have large holdings in Target, including the iShares Core S&P 500 ETF (IVV), which owns 4.05 million shares, and the Vanguard S&P 500 ETF (VOO), which owns 3.56 million shares. 

Brian Cornell, Target’s CEO, said the current environment has its roadblocks, but he’s confident in its decision to increase its inventory levels of products.  

“I'm really pleased with the underlying performance of our business, which continues to grow traffic and sales while delivering broad-based unit-share gains in a very challenging environment,” he said. “While these inventory actions put significant pressure on our near-term profitability, we're confident this was the right long-term decision in support of our guests, our team and our business.” 

Target’s not alone in facing inventory issues. Retailers across the board, including competitors, like Walmart Inc., began warning investors early in the summer that their inventory levels were higher than normal because of fears of global supply chain bottlenecks that have plagued companies since the start of the pandemic.  

Consumers have started to pull back on their spending as higher inflation rates have pushed up the costs of food, housing and energy, and since wages have not kept up with the increase in spending. 

ETF Exposure 

The top three ETFs with the most exposure to shares of Target include the VanEck Retail ETF (RTH), which has 4.48% of its holdings in the retailer, followed by the ETC 6 Meridian Quality Growth ETF (SXQG), with 2.89% and the iShares Evolved U.S. Discretionary Spending ETF (IEDI), with 2.74%. 

All three ETFs declined only slightly from Target’s lower earnings—SXQG fell the most, by 1.5%, while IEDI dipped by 0.8%, followed by RTH declining 0.77%.  

The three top-performing ETFs with exposure to Target include the ProShares UltraPro S&P500 (UPRO), the ProShares Ultra Consumer Services (UCC) and the ProShares Ultra S&P 500 (SSO), whose 30-day returns rose by 19.58%, 18.08% and 13.09%, respectively.   

The inventory problem also isn’t new for the company. Target told investors in June that its inventory levels were higher by 35%, resulting in price cuts across various categories in its store and would hurt its profit margins.