Tag Archives: Earnings Projections

Business

Meta stock spikes despite earnings miss, as Facebook hits 2 billion users for first time and sales guidance quells fears

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Meta Platforms Inc. shares soared in after-hours trading Wednesday despite an earnings miss, as the Facebook parent company guided for potentially more revenue than Wall Street expected in the new year and promised more share repurchases amid cost cuts.

Meta
META,
+2.79%
said it hauled in $32.17 billion in fourth-quarter revenue, down from $33.67 billion a year ago but stronger than expectations. Earnings were $4.65 billion, or $1.76 a share, compared with $10.3 billion, or $3.67 a share, last year.

Analysts polled by FactSet expected Meta to post fourth-quarter revenue of $31.55 billion on earnings of $2.26 a share, and the beat on sales coincided with a revenue forecast that also met or exceeded expectations. Facebook Chief Financial Officer Susan Li projected first-quarter sales of $26 billion to $28.5 billion, while analysts on average were projecting first-quarter sales of $27.2 billion.

Shares jumped more than 18% in after-hours trading immediately following the release of the results, after closing with a 2.8% gain at $153.12.

Alphabet Inc.’s
GOOGL,
+1.61%

GOOG,
+1.56%
Google and Pinterest Inc.
PINS,
+1.56%
benefited from Meta’s results, with shares for each company rising 4% in extended trading Wednesday.

“Our community continues to grow and I’m pleased with the strong engagement across our apps. Facebook just reached the milestone of 2 billion daily actives,” Meta Chief Executive Mark Zuckerberg said in a statement announcing the results. “The progress we’re making on our AI discovery engine and Reels are major drivers of this. Beyond this, our management theme for 2023 is the ‘Year of Efficiency’ and we’re focused on becoming a stronger and more nimble organization.”

Read more: Snap suffers worst sales growth yet in holiday quarter, stock plunges after earnings miss

Facebook’s 2 billion-user milestone was slightly better than analysts expected for user growth on Meta’s core social network. Daily active users across all of Facebook’s apps neared, but did not crest, another round number, reaching 2.96 billion, up 5% from a year ago.

Meta has been navigating choppy ad waters as it copes with increasing competition from TikTok and fallout from changes in Apple Inc.’s
AAPL,
+0.79%
ad-tracking system in 2021 that punitively harmed Meta, costing it potentially billions of dollars in advertising sales. Meta has invested heavily in artificial-intelligence tools to rev up its ad-targeting systems and making better recommendations for users of its short-video product Reels, but it laid off thousands of workers after profit and revenue shrunk in recent quarters.

The cost cuts seemed to pay off Wednesday. While Facebook missed on its earnings, it noted that the costs of its layoffs and other restructuring totaled $4.2 billion and reduced the number by roughly $1.24 a share.

Meta executives said they now expect operating expenses to be $89 billion to $95 billion this year, down from previous guidance for $94 billion to $100 billion. Capital expenditures are expected to be $30 billion to $33 billion, down from previous guidance of $34 billion to $37 billion, as Meta cancels multiple data-center projects.

In a conference call with analysts late Wednesday, Zuckerberg called 2023 the “year of efficiency.”

“The reduced outlook reflects our updated plans for lower data-center construction spend in 2023 as we shift to a new data-center architecture that is more cost efficient and can support both AI and non-AI workloads,” Li said in her outlook commentary included in the release.

Meta expects to increase its spending on its own stock. The company’s board approved a $40 billion increase in its share-repurchase authorization; Meta spent nearly $28 billion on its own shares in 2022, and still had nearly $11 billion available for buybacks before that increase.

“Investors are cheering Meta’s plans to return more capital to shareholders despite worries over rising costs related to its metaverse spending,” said Jesse Cohen, senior analyst at Investing.com.

The results came a day after Snap Inc.
SNAP,
-10.29%
posted fourth-quarter revenue of $1.3 billion, flat from a year ago and the worst year-over-year sales growth Snap has ever reported. But they also arrived on the same day Facebook scored a major win in a California court. The company successfully fended off the Federal Trade Commission bid to win a preliminary injunction to block Meta’s planned acquisition of VR startup Within Unlimited.

Read more: Meta wins bid to buy VR startup Within Unlimited, beating U.S. FTC in court: report

Meta shares have plunged 53% over the past 12 months, while the broader S&P 500 index 
SPX,
+1.05%
has tumbled 10% the past year.

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Business

3M to Cut Jobs as Demand for Its Products Weakens

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3M Co.

said it is cutting 2,500 manufacturing jobs globally as the company confronts turbulence in overseas markets and weakening consumer demand.

The maker of Scotch tape, Post-it Notes and thousands of other industrial and consumer products said Tuesday that it expects lower sales and profit in 2023 after demand weakened significantly in late 2022, pulling down quarterly performance.

The St. Paul, Minn., company forecast sales this year to slip from last year’s level with weak demand for consumer products and electronic items, particularly smartphones, tablets and televisions, for which 3M provides components. Fourth-quarter sales for 3M’s consumer business dropped nearly 6% from the same period a year earlier.

“Consumers sharply cut discretionary spending and retailers adjusted their inventory levels,” 3M Chief Executive

Mike Roman

said during a conference call. “We expect the demand trends we saw in December to extend through the first half of 2023.”

3M shares were down 5.2% at $116.25 Tuesday afternoon, while major U.S. stock indexes were little changed.

The company said demand for its disposable face masks is receding, as healthcare providers spend less on Covid-19 measures, and mask demand returns to prepandemic levels. 3M said it expects mask sales to decline between $450 million and $550 million this year from 2022.

3M executives said the spread of Covid infections in China is weighing on sales there, and sporadic plant closings are interrupting industrial production. China also is reducing production of consumer electronics because of weakening consumer demand, they said, and 3M’s exit from its business in Russia last year will also contribute to lower sales this year.

The 2,500 layoffs represent roughly 2.6% of the company’s workforce, which a regulatory filing said was about 95,000 at the end of 2021. Mr. Roman declined to specify where the job cuts will take place, or whether the company might make further reductions as it reviews its supply chains and prepares to spin off its healthcare unit.

“We’re looking at everything that we do as we manage through the challenges that we’re facing in the end markets and we focus on driving improvements,” he said.

The company said it would take a pretax restructuring charge in the first quarter of $75 million to $100 million.

Mr. Roman said the job cuts were unrelated to litigation facing the company. 3M is defending against allegations that the so-called forever chemicals it has produced for decades have contaminated soil and drinking water. It is also involved in litigation over foam earplugs its subsidiary Aearo Technologies LLC sold to the military. About 230,000 veterans have filed complaints in federal court alleging the earplugs failed to protect them from service-related hearing loss.

3M has said the earplugs were effective when military personnel were given sufficient training on how to use them. In litigation over firefighting foam that incorporated forms of forever chemicals, 3M is expected to argue that the products were produced to U.S. military specifications, granting the company legal protection as a government contractor.

In both cases, Mr. Roman said the company is focused on finding a way forward.

3M said the strong value of the U.S. dollar continues to erode sales from other countries when foreign currencies are converted to dollars.

The company forecast that sales for the quarter ending March 31 will be down 10% to 15% from the same period last year. For the full year, the company projects sales to fall between 6% and 2%, and expects adjusted earnings of $8.50 a share to $9 a share. The company earned $10.10 a share in 2022, excluding special charges, and analysts surveyed by FactSet were expecting the company to earn $10.22 in 2023.

For the fourth quarter, the company posted a profit of $541 million, or 98 cents a share, compared with $1.34 billion, or $2.31 a share, a year earlier.

Stripping out one-time items, including costs tied to exiting the company’s operations making forever chemicals, adjusted earnings came to $2.28 a share. Analysts were looking for adjusted earnings of $2.36 a share, according to FactSet.

Sales fell 6% to $8.08 billion for the quarter, slightly topping expectations of analysts surveyed by FactSet.

Mr. Roman said there were promising signs for some of 3M’s businesses, including in biopharma processing, home improvement and automotive electrification, the last of which he said grew 30% in 2022 to become a roughly $500 million business.

“There’s more to it than consumer electronics, but certainly the consumer-electronics dynamics are the story of the day,” he said.

Write to John Keilman at john.keilman@wsj.com and Bob Tita at robert.tita@wsj.com

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Business

Target Shares Plunge on Earnings Miss and Weak Holiday Sales Forecast

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Target Corp.

TGT -13.14%

said consumers pulled back on their spending in recent weeks, sapping sales and profits in the latest quarter and putting a cloud over its holiday season.

Quarterly profits came in below Target’s forecasts and the company’s sales growth lagged behind larger rival

Walmart Inc.

WMT 0.72%

in the period. Target executives lowered their financial goals for the holiday quarter and said they are prepared to offer deep discounts in the coming months to clear out unwanted inventory and attract shoppers.

Target shares dropped 13% in Wednesday trading on the earnings, which came in well below Wall Street’s estimates. It is the second time this year the retailer has misjudged consumer demand—in the spring executives said they were surprised by shifts away from furniture and appliances.

Government data released Wednesday showed that retail spending, including purchases at restaurants, car dealers and gas stations, rose 1.3% in October from September. The data aren’t adjusted for inflation and the government earlier reported that consumer prices rose 7.7% in October from a year earlier.

Target executives said that sales worsened sharply in October and November with guests’ shopping behaviors increasingly affected by inflation, rising interest rates and economic uncertainty.

“Clearly it’s an environment where consumers have been stressed,” said Target Chief Executive

Brian Cornell

on a call with reporters. “We know they are spending more dollars on food and beverage and household essentials, and as they are shopping for discretionary categories they are looking for promotions.”

Target executives said consumers are waiting to purchase items until they spot a deal, buying smaller pack sizes and giving priority to family needs. Sales of food, beverage, beauty products and seasonal items were strong, they said.

Retailers are facing an uncertain holiday season with high food and gas prices pinching some households. Target, like many of its peers, has been discounting to try to clear out a glut of goods this summer. Target’s inventory rose 14.4% in the October quarter from a year ago, while its revenue rose 3.4%. Quarterly net income tumbled by half.

“We are committed to being clean at the end of the holiday season,” regarding excess inventory, said Target Chief Financial Officer

Michael Fiddelke,

on a call with analysts Wednesday. If consumer trends of recent weeks persist, “it will come with more markdowns to make sure we accomplish exactly that goal.”

Rival TJX Cos. reported mixed quarterly results on Wednesday, with lower sales and higher profit margins. The off-price retailer said its U.S. comparable-store sales declined 2% in the quarter, as gains in its Marshalls and T.J. Maxx apparel chains were offset by a drop in its HomeGoods chain.

TJX said it was comfortable with its inventory levels heading into the holidays and said it now expected U.S. comparable-store sales to be flat or up 1% from a year ago.

Walmart gets over half of its U.S. revenue from groceries, while Target’s business is more skewed toward discretionary categories such as home goods, apparel, electronics and beauty products. As consumers absorb higher prices, many are pulling back spending where they can.

Consumer spending has held up relatively well so far despite inflation, but experts say we’re approaching an inflection point. WSJ’s Sharon Terlep explains the role “elasticity” plays in a company’s decision on whether to raise prices. Photo illustration: Adele Morgan

For the most recent quarter, Target said comparable sales, those from stores and digital channels operating at least 12 months, rose 2.7% in the quarter ended Oct. 29 compared with the same period last year.

On Tuesday Walmart said U.S. comparable sales rose 8.2% in the quarter. Walmart executives said the retailer is attracting more higher-income shoppers as many shift spending away from discretionary categories to food and look for value.

Target said it is gaining market share in its five main categories, even as consumers pull back spending in some cases. Existing shoppers are buying more and visiting more frequently, said Christina Hennington, Target’s chief growth officer. Traffic to stores increased 1.4% in the most recent quarter.

This year Target expects a hit to its gross margin of around $600 million due to shrink, the industry term for theft and other product loss, said Mr. Fiddelke. “We’ve seen that trend has grown over the course of the year,” he said.

SHARE YOUR THOUGHTS

What’s your outlook on Target and why? Join the conversation below.

Target, which surprised investors by slashing its forecasts twice in the spring, on Wednesday reduced its sales and profits expectations for its fiscal year, which ends in January.

“We expect the challenging environment to linger on beyond the holiday,” said Mr. Fiddelke.

The company now expects a low-single-digit percentage decline in comparable sales and an operating margin around 3% for the fourth quarter. In August Target said sales would grow in the low- to mid-single-digit percentage range for the full year and operating margin would be around 6% for the second half of the year.

Target executives said they would look to cut at least $2 billion in costs over three years. Executives said the company isn’t planning major layoffs or hiring freezes as part of the new cost-cutting program, but streamlining processes inside the company.

—Suzanne Kapner contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

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Business

PayPal earnings forecast heads higher, but revenue outlook sends the stock lower yet again

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PayPal Holdings Inc.’s cost-savings story began to play out in the latest quarter, but that wasn’t enough to satisfy investors as the digital payments giant also cut its revenue forecast for the full year in light of the “rough macro environment.”

Shares fell 10% in after-hours trading after PayPal
PYPL,
-3.65%
executives trimmed their revenue guidance for 2022, saying that they were now looking for 10% growth on a currency-neutral basis, whereas the prior forecast called for 11% growth.

Management has cut expectations on a series of guidance metrics throughout the year.

“We’re executing against all the things we can control…and preparing prudently for a rough macro environment,” Chief Executive Dan Schulman told MarketWatch. He added that PayPal was “seeing a pullback in discretionary goods that are being spent on by consumers,” hence why he and the executive team felt the need to have a “prudent” revenue outlook for the fourth quarter. 

Acting Chief Financial Officer Gabrielle Rabinovitch added on the company’s earnings call that PayPal “didn’t see the early start to the holiday season” during October that the company saw back in 2021.

See also: Block stock rockets higher after earnings as Square parent posts a ‘strong beat all around’

Though PayPal cut its revenue forecast for the full year, it outperformed on the top line during the third quarter. Revenue climbed to $6.85 billion from $6.18 billion, while analysts had been projecting $6.81 billion. PayPal’s total payment volume rose to $337 billion from $310 billion a year prior. Venmo volume was $63.6 billion.

The reduced full-year revenue forecast outweighed progress on the cost-savings program that executives outlined in the previous earnings report.

PayPal reported adjusted earnings of $1.08 a share in the latest quarter, down from $1.11 a share a year before but ahead of the FactSet consensus, which was for 96 cents a share. Executives now model $4.07 a share to $4.09 a share in adjusted earnings for the full year, which is ahead of the prior forecast that called for $3.87 a share to $3.97 a share.

“While there are a number of unknowns regarding the macro environment, we can largely control our spend and its implication on earnings growth,” Schulman said on the earnings call “Of course, we’re also focused on investing for growth and we are balancing efficient spend with continued investment to drive future top-line growth.”

He added that the uncertain environment could also present opportunity for PayPal.

“We think this is a time where market-share leaders get stronger,” Schulman said.

PayPal shares have fallen nearly 60% this year, as the S&P 500 index
SPX,
-1.06%
has declined 21.1%

Read: Amazon rolling out Venmo payment option

The company recognized a boost in engagement during its latest quarter as transactions per active account rose 13% to 50.1 over a trailing 12-month period. PayPal added 2.9 million net new active accounts in the third quarter, bringing its total to 432 million. The FactSet consensus was for 432.9 million active accounts.

Earlier this year, PayPal began to shift its focus more on generating engagement among existing users than on attracting and retaining less active customers.

Schulman told MarketWatch that the company’s digital wallet has helped drive improved engagement trends, as PayPal sees two times the level of engagement among those who use the app versus those who don’t.

PayPal executives announced several initiatives in progress with Apple Inc.
AAPL,
-4.25%,
including future participation in the Tap to Pay on iPhone program that lets people use their smartphones as payment-acceptance devices without requiring additional hardware. Additionally, PayPal and Venmo debit and credit cards will be eligible next year for inclusion in Apple Wallet. PayPal also plans to add Apple Pay as a payment option in its unbranded checkout platform.

Those developments mark a “meaningful step forward,” Schulman told MarketWatch.

He added on the earnings call that the arrangement with Apple is “a bigger deal than most people realize” given trends the company has observed with Alphabet Inc.’s
GOOG,
-4.11%

GOOGL,
-4.07%
Google Pay: “We’ve seen, for instance, that Google Pay users in Germany when they add their PayPal credentials there, there’s a 20% increase in their branded checkout transactions.”

See more: Apple will let merchants accept in-person payments with only an iPhone

Executives offered a first look at 2023 expectations in an investor presentation Thursday. They’re targeting adjusted EPS growth of at least 15% as well as at least 100 basis points of operating-margin expansion.

Schulman said that EPS growth at the targeted range would put PayPal in the top quartile of S&P 500 components on the metric.

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Business

Lyft to Lay Off About 700 Employees in Second Round of Job Cuts

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Lyft Inc.

LYFT -0.61%

said it is cutting 13% of staff, or nearly 700 jobs, the latest technology company to say it needed to reduce costs ahead of choppy economic conditions.

Confirming an earlier report by The Wall Street Journal, Lyft co-founders

John Zimmer

and

Logan Green

announced the cuts to staff Thursday. “There are several challenges playing out across the economy. We’re facing a probable recession sometime in the next year and ride-share insurance costs are going up,” they wrote in the memo viewed by the Journal.

“We worked hard to bring down costs this summer: we slowed, then froze hiring; cut spending; and paused less-critical initiatives. Still, Lyft has to become leaner, which requires us to part with incredible team members,” they added.

The ride-hailing company has more than 5,000 employees, which don’t include its drivers. Lyft laid off 60 people, or under 2% of its workforce, in July. In May, it said it planned to slow hiring and reduce the budgets of some of its departments.

Technology companies large and small have been announcing hiring freezes or staffing cuts this year after many hired at a breakneck speed through the pandemic and now confront a tougher economic outlook. This week,

Amazon.com Inc.

told employees it is pausing corporate hiring and payments startup Stripe Inc. said Thursday that it is laying off about 14% of its employees. Both blamed the harsh economic climate for their decisions.

San Francisco-based Lyft also said that it would sell its vehicle service centers and that most of that team is expected to receive roles from the acquiring company, which it didn’t name. Lyft has centers in nine markets.

The company maintained its third quarter and 2024 earnings outlook but said it expects to incur $27 million to $32 million in restructuring related to Thursday’s layoffs in this year’s fourth quarter. The company posts third-quarter results Monday.

Lyft shares have underperformed the broader market over the past 12 months. Through Wednesday’s close, its stock was down 71% from a year ago while the tech-heavy Nasdaq Composite Index was down 33%.

Rival

Uber Technologies Inc.’s

diversified business, which includes global rides operations and a food-delivery arm that became its lifeline during the pandemic, has fared better with Wall Street. Its stock is down about 37% in the past year.

In May, Uber said it would slow hiring. Both companies have struggled with a driver shortage over the past year, an imbalance that has pushed ride fares to record highs. Uber said active drivers and riders returned to prepandemic levels for the first time in this year’s third quarter.

Write to Preetika Rana at preetika.rana@wsj.com and Emily Glazer at emily.glazer@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Amazon Stock Slides After it Gives Weak Outlook Amid Recession Fears

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Amazon.com Inc.

AMZN -4.06%

projected sales in the current quarter would be far below expectations, sending its stock plunging and offering the latest stark sign of how shifting economic forces are battering tech giants that thrived during the pandemic.

The company on Thursday said sales in the recently completed third quarter rose 15% from a year earlier, while net income was $2.9 billion—its first quarterly profit in 2022, though still a 9% decline from the same period last year.

The e-commerce giant jolted investors with its projection for revenue of $140 billion to $148 billion in the current period—analysts had expected more than $155 billion, according to FactSet. Amazon, which said the estimate includes a sizable hit from foreign-exchange factors, also said it anticipated operating income of anywhere between zero and $4 billion, reflecting the uncertainty looming over what is traditionally its biggest quarter of the year because of holiday shopping.

The company’s shares fell more than 12% in after-hours trading following the results to trade near $97. At that level, Amazon’s valuation is below $1 trillion, which it first hit in 2018.

The disappointing outlook capped an extraordinary several days that also saw shares of other tech giants plummet after their results showed worsening conditions in a range of areas.

Shares of

Facebook

parent Meta Platforms Inc., already battered over the past year, dropped nearly 25% on Thursday after it reported its second quarterly revenue decline in a row a day earlier.

Microsoft Corp.’s

stock also fell after it delivered on Tuesday its worst net income decline in more than two years and the weakest revenue growth in over five years. Google-parent

Alphabet Inc.

similarly disappointed investors with slowing sales.

These tech companies flourished during the pandemic, as life and work suddenly shifted more to the internet, pushing up sales and spurring the already fast-growing companies to accelerate hiring and investment.

Now, one after another, engines that drove that growth are sputtering. Sales of personal computers and other gadgets are falling. Consumers, walloped by inflation, are broadly trimming their spending, while companies are tightening their outlays for everything from digital ads to IT services.

“There is obviously a lot happening in the macroeconomic environment, and we’ll balance our investments to be more streamlined without compromising our key long-term, strategic bets,” Amazon Chief Executive

Andy Jassy

said Thursday. 

In the third quarter, Amazon’s online store sales rose 7% to $53.48 billion after falling in recent quarters. The segment includes product sales primarily on its flagship site and digital media content. Its online sales got a boost from its annual Prime Day sale, which this year fell in the third quarter where last year it was in the second quarter.

While still the nation’s largest online store, Amazon’s e-commerce division has struggled to grow this year. The company in the second quarter reported a 4% year-over-year drop in its online stores segment. That marked the largest drop since the metric was first reported in 2016.

This year, Amazon’s e-commerce machine—which has grown at breakneck speed for decade—has been showing signs that it could be entering a phase of slower growth. After a multibillion-dollar infrastructure build-out and hiring spree, it now has to contend with high inflation and concerns about a recession weighing on consumer spending.

Chief Financial Officer

Brian Olsavsky

said the company has entered a period of caution.

“We are preparing for what could be a slower growth period like most companies. We are going to be very careful on our hiring,” Mr. Olsavsky said during a call with reporters Thursday. “We certainly are looking at our cost structure and looking for areas where we can save money.”

He said Amazon is “seeing signs all around that people’s budgets are tight, inflation is still high.”

Analysts say the new challenges Amazon faces in e-commerce could linger.

Amazon has the largest share of online commerce, about 38%, but its market share has plateaued in recent years, according to market research firm Insider Intelligence. Analysts say the company’s size has made it unlikely the e-commerce unit’s growth would hit the same pace it once did. Amazon also is dealing with increased competition from

Walmart Inc.,

Target Corp.

and others.

Mr. Jassy has shifted toward cost-cutting. The company cut back on subleasing millions of square feet of excess warehouse space and put off opening new facilities while earlier thinning out its hourly workforce through attrition.

It enacted a hiring freeze through the end of the year at its corporate retail division, the segment that drives core sales and is responsible for a large part of this year’s slowdown. The company has paused hiring among some teams at its Amazon Web Services cloud-computing division.

While Amazon’s earnings continue to be aided by AWS and its expanding advertising business, growth slowed in the cloud business. AWS had sales of $20.5 billion during the third quarter, a 27% rise but one of the lowest rates of growth posted by the unit in recent quarters. Mr. Olsavsky said the company saw AWS customers “working to cut their bills.”

Amazon’s advertising revenues rose 25% to $9.5 billion.

Amazon is headed toward the end of the year with added challenges. After needing fewer blue-collar employees earlier in the year, it has looked to add more than 100,000 workers at its warehouses to meet the expected holiday demand. Still, that strategy has come with a cost. Amazon recently said it would spend $1 billion to raise average starting salaries to $19 an hour nationwide and is earmarking millions to raise wages and benefits for its delivery employees.

Consumers will be more likely to return to bricks-and-mortar stores for their holiday shopping this year, and economic concerns will likely weigh on spending, according to analysts. Amazon’s own

Jeff Bezos

seemed cautious about the future. He recently said it is time to “batten down the hatches,” referring to warning signs that the U.S. is headed for a recession.

Write to Sebastian Herrera at sebastian.herrera@wsj.com

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Business

Target’s Profit Sinks as Retailer Unloads Unwanted Inventory

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A glut of inventory sank profit at

Target Corp.

further than it expected, sparking investor concerns about the company’s response to an oversupply problem haunting retailers from

Walmart Inc.

to the parent of T.J. Maxx.

Like many other retailers, Target didn’t foresee the sharp reversal in buying behavior that has taken place in recent months as shoppers, squeezed by inflation, shifted more spending to travel and cut back on patio furniture, small electronics and other items that were in high demand for much of the Covid-19 pandemic. Target took a more aggressive approach than some of its competitors, slashing prices and canceling orders to clear out the glut as quickly as possible.

The decision to quickly move through excess inventory “had a meaningful short-term impact on our financial results,” Target Chief Executive

Brian Cornell

said on a call with reporters. He said the company didn’t want to deal with excess inventory for years, potentially degrading the customer and worker experience.

“Today the vast majority of the financial impact of these inventory actions is now behind us,” he said. In the current quarter the company expects a roughly $200 million impact from its effort to reduce inventory, Chief Financial Officer

Michael Fiddelke

said on a conference call Wednesday. The company expects operating margin to rise to 6% in the second half of the year.

About 75% of the U.S. population can find a Target store within a 10-mile radius. WSJ’s Sarah Nassauer explains how the retailer leverages its physical stores to expand services such as in-store pickup and same-day shipping. Photo Illustration: Ryan Trefes

Target shares were off 2.6% at $175.46 at midday Wednesday.

T.J. Maxx parent

TJX

TJX 4.43%

Cos. said Wednesday that inventory rose 39% in the most recent quarter, while sales fell 1.9%. The company said it is comfortable with its inventory levels and that lower gasoline prices could boost consumer spending for its goods.

Large retail chains including Walmart and

Home Depot Inc.

have reported higher sales for the most recent quarter driven by consumers’ willingness to absorb price increases. The results so far indicate Americans continue to spend even as they shift purchases away from nonfood items to offset the effects of inflation.

Overall retail sales—a measure of spending at stores, online and in restaurants—were flat in July as gasoline prices fell, compared with an increase of 0.8% in June, the Commerce Department said Wednesday. Stripping out gasoline and auto sales, retail sales rose 0.7% in July.

Walmart, like Target, has discounted goods to pare excess inventory. Those efforts ate into last quarter’s profit and will continue in the current quarter, executives said Tuesday.

Target executives said traffic gains and the overall spending strength among its core shoppers are evidence that the retailer can put the inventory issues behind it. The retailer believes it is gaining market share by unit sales in all major categories, executives said. Target shoppers are buying fewer discretionary items as prices rise, but “we’ve got a guest that is still out shopping,” Mr. Cornell said.

Target’s inventory challenge rippled through its business over the past quarter, company executives said on a call with analysts Wednesday. In June inventory in Target’s warehouse network peaked at more than 90% of capacity, before dropping to below 80% by the end of the period, Chief Operating Officer

John Mulligan

said. The company aims to keep capacity at or below 85% to reduce cost and operational difficulties, he said.

SHARE YOUR THOUGHTS

How has your shopping at Target changed over the past year? Join the conversation below.

To dispose of the excess inventory Target offered discounts, canceled orders and adjusted how it ordered products for the second half of the year, favoring items such as food that shoppers are now buying more of, executives said on the call. Target used store space typically reserved for seasonal goods to highlight deals, stopped selling outdoor products earlier than usual and brought in back-to-school items ahead of schedule. The company canceled $1.5 billion in fall discretionary product orders, executives said.

The company continues to import goods earlier than it did before the pandemic to make sure seasonal merchandise arrives on time, but believes supply-chain snarls have peaked, Mr. Mulligan said. Target’s inventory rose nearly 10% in the second quarter to $15.3 billion as the retailer prepares for fall and holiday shopping, he said.

Target’s net earnings were $183 million, compared with $1.8 billion during the same period last year.

The company’s revenue rose, boosted by strong sales of food-and-beverage, beauty and household items as well as more shopper visits. Comparable sales, those from stores and digital channels operating at least 12 months, rose 2.6% in the quarter compared with the same period last year. Shopper traffic increased 2.7% in the quarter. Shoppers spent slightly more for fewer items per transaction during the quarter.

Home Depot said Tuesday that its sales rose, in part because of higher prices, while traffic fell in the most recent quarter. Walmart said its sales rose, also helped by higher prices, and traffic increased 1% in the quarter.

Target revenue rose 3.5% during the quarter to $26 billion. It maintained previous estimates for the full year of revenue growth in the low- to mid-single-digit percentage range.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

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Business

Disney Reports Earnings Surge, Reduces Long-Term Forecast for Disney+ Subscribers

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Walt Disney Co.

DIS 3.98%

reported a better-than-expected 26% jump in revenue Wednesday, driven by record results at its theme parks division and the addition of more new subscribers than projected to its flagship streaming video platform Disney+.

Disney’s results highlight the complex dynamics of the competitive streaming landscape. The company lowered its forecast for future Disney+ growth, raised the prices on its streaming offerings, outlined plans for a new ad-supported tier of Disney+ and said nearly all of the streaming service’s growth is coming from overseas.

The company’s earnings this quarter reflect the difficulties it and rivals, such as

Netflix Inc.,

face in attracting new customers domestically, where streaming options abound and many households use one or more services. Plus, in an increasingly difficult economic environment, some households are rethinking spending on in-home entertainment, industry analysts have said.

Chief Executive

Bob Chapek

said he didn’t think the price changes would result in any meaningful loss of streaming customers. “We believe that we’ve got plenty of price value room left to go,” Mr. Chapek said.

On the company’s call with analysts, Chief Financial Officer

Christine McCarthy

ratcheted down its forecast for Disney+, saying it now expects a total range of 215 million to 245 million subscribers by September 2024, in part because it lost the right to air popular Indian cricket competitions.

A few months ago, Mr. Chapek said the company’s previous target of 230 million to 260 million, set by the company in December 2020, was “very achievable.”

In the three-month period ended July 2, Disney+ gained 14.4 million new subscribers, bringing its global total to 152.1 million subscribers. Analysts were expecting 10 million additions, according to

FactSet.

Wednesday’s report brings Disney’s total subscriber base to 221.1 million customers across all of its streaming offerings, including ESPN+ and Hulu, surpassing Netflix, its chief streaming rival, in total customers. Netflix last month reported it had 220.67 million subscribers.

Disney shares rose about 7% in after-hours trading to $120.11.

Overall for the third quarter, the world’s largest entertainment company reported profits of $1.41 billion, or 77 cents a share, up from $918 million, or 50 cents a share, in the year-ago period. Revenue increased to $21.5 billion, above the average analyst estimate of $20.99 billion on FactSet.

Since 1967, the Florida land housing Disney’s theme parks has been governed by the company, allowing it to manage Walt Disney World with little red tape. WSJ’s Robbie Whelan explains the special tax district that a Florida bill would eliminate. Photo: AP

Sales at the parks, experiences and products division—which includes Disneyland, Walt Disney World and four resorts in Europe and Asia and has historically been Disney’s most profitable segment—reached $7.4 billion for the quarter, a record, and was up 70% from a year earlier. The division posted profits of $2.2 billion for the quarter, up from $356 million a year ago.

“Demand has not abated” at the parks, Ms. McCarthy said. Since reopening in 2021 after pandemic-related closures, Disney’s theme parks haven’t been running at full capacity, but a new online reservations system and ride-reservation apps have helped the company better respond to demand and generate more revenue per visitor.

Over the past year, CEO Bob Chapek and other top Disney executives have signaled an increased focus on international markets for growing its streaming business.



Photo:

Laurent Viteur/Getty Images

Ms. McCarthy said that if economic conditions worsen, Disney could tweak the reservation system to allow more visitors in on certain days, but as of now, demand is outstripping available spots.

Disney’s direct-to-consumer segment, which includes video streaming, lost $1.1 billion in the third quarter, widening from a loss of $293 million a year earlier. Since Disney+ launched in late 2019, the segment has lost more than $7 billion. On Wednesday, Ms. McCarthy said Disney’s estimate for overall spending on content for fiscal 2022 had fallen slightly, from $32 billion to $30 billion.

Disney gave a launch date of Dec. 8 and outlined pricing information for its previously announced ad-supported tier of Disney+ in the U.S., a new product designed to expand the reach of the company’s streaming business.

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The price of the ad-free stand-alone Disney+ service will rise from its current level of $7.99 a month in the U.S. to $10.99 a month, or $109.99 a year. The new, basic Disney+ service with ads will cost $7.99 a month.

The premium Disney streaming bundle, which includes ad-free versions of Disney+ and Hulu, as well as a version of sports-focused ESPN+ with ads, will remain at its current price of $19.99 a month in the U.S., while a bundle that includes all three services, but with ads on Hulu, will rise in price by $1 a month, to $14.99.

Mr. Chapek defended the price increases, saying that when it was launched, Disney+ was among the most competitively-priced streaming offerings and that the company has added more and higher-quality content to the service.

“I think it’s easy to say that we’re the best value in streaming,” Mr. Chapek said Wednesday.

Over the past year, Mr. Chapek and other top Disney executives have signaled an increased focus on international markets for growing its streaming business. Disney is spending heavily to produce hundreds of local-language television shows in countries such as India, and over the summer, Disney+ launched in 53 new countries and territories, mainly concentrated in Eastern Europe, the Middle East and North Africa.

Pricing for a Disney+ subscription in many of these new markets runs below the $7.99 a month that American customers pay. Still, Disney+’s average monthly revenue per paid subscriber—a key metric in streaming businesses—stood at $6.27 in North America, compared with $6.29 internationally, excluding Asia’s more inexpensive Disney+ Hotstar service.

Disney+ Hotstar, the service used by Disney’s 58.4 million subscribers in India, produces just $1.20 a month per user. Some analysts and former Disney executives predict that losing cricket streaming rights will result in millions of canceled accounts over the next year.

The flagging growth of North American Disney+ subscriptions is likely the result of a glut of content being released by in movie theaters and on a proliferation of streaming services, as well as fatigue the Star Wars and Marvel superhero movie franchises, said Francisco Olivera, a Disney shareholder who manages a small family fund based in Puerto Rico that has about 15% of its holdings in Disney stock.

The addition of an ad-supported tier, higher prices and possible further integration of the Hulu service in the future, could help reduce subscriber churn and make it easier to achieve profitability, he said.

“It’s a healthier market right now with the parks recovering, so they’re really flexing their muscles on pricing,” Mr. Olivera said.

—Sarah Krouse contributed to this article.

Write to Robbie Whelan at Robbie.Whelan@wsj.com

Corrections & Amplifications
Disney+ launched in 53 new countries and territories over the summer. An earlier version of this article incorrectly said it launched in 54. (Corrected on Aug. 10)

Write to Robbie Whelan at robbie.whelan@wsj.com

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Business

Avaya’s Collapsing Debt Deal Hits Clients of Goldman, JPMorgan

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The two banks sold new loans and bonds for Avaya, a cloud-communications company, in late June. Investors included Brigade Capital Management LP and Symphony Asset Management LLC, people familiar with the matter said.

A few weeks later, Avaya announced that it would miss by more than 60% its previous forecasts for adjusted earnings in the third quarter, which ended June 30. It gave no explanation. The company also said that it would miss revenue targets and announced it was removing its chief executive officer.

Prices of the newly issued debt plummeted, hitting investors who lent Avaya the money with paper losses exceeding $100 million, according to analyst commentary and data from MarketAxess and Advantage Data Inc.

Avaya said Tuesday that it “has determined that there is substantial doubt about the Company’s ability to continue as a going concern.” It also said that the audit committee of the board of directors had opened an internal investigation “to review the circumstances surrounding” the most recent quarter. The committee is also investigating a whistleblower letter, but it didn’t give details.

Avaya also tapped law firm Kirkland & Ellis LLP and turnaround adviser AlixPartners LLP as it considers its options, The Wall Street Journal reported Tuesday.

New CEO

Alan Masarek

held an abbreviated conference call Tuesday to discuss third-quarter earnings and declined to take questions from Wall Street analysts. Mr. Masarek attributed Avaya’s poor performance in part to clients signing up for smaller and shorter software subscription contracts than expected, potentially out of fear about the company’s debt load.

“I understand very clearly that there is disappointment, there’s worry, there’s concern out there across effectively all Avaya stakeholders,” Mr. Masarek said. “I’m going to thank you in advance for your patience… Give us some time to demonstrate a better future.”

Avaya’s 6.125% bond due 2028 fell as low as 48.50 cents on the dollar after the presentation, down from a close of 56.25 cents on Monday, according to data from MarketAxess.

Some analysts were already skeptical of Avaya’s financial forecasts.

“Why [are] your projections always faltering when you report quarterly results? Why can’t you have a stable outlook?” asked

Hamed Khorsand,

an analyst at BWS Financial, after the company’s last quarterly earnings report in May. Avaya undershot that quarter’s adjusted-earnings targets by about 10%.

Avaya’s former CEO Jim Chirico, applauding at the company’s stock listing in 2018, was removed last month.



Photo:

Richard Drew/Associated Press

Then-CEO

Jim Chirico

attributed the fumble to Avaya’s adoption of a new sales strategy that forced the company to recognize revenue more slowly. “We believe we’re over that hurdle,” he said at the time.

Avaya emerged as a telecommunications-equipment supplier to corporations in 2000, when it spun out of Lucent Technologies. Private-equity firms TPG and Silver Lake Partners bought the company in 2007, but it struggled to transition from selling hardware to selling software, and with servicing debt from the buyout. The company filed for bankruptcy protection a decade later before reorganizing. Mr. Chirico took the helm in 2017 and shifted to developing cloud-based software for enterprises.

“Avaya squandered a lot of money and time and has little to show for it,” independent enterprise communications analyst Dave Michels wrote in a recent report. “Many of us have wondered why the board didn’t act sooner—years sooner.”

A spokeswoman for Avaya declined to comment on analysts’ critiques.

The financial crunch hit this spring when Avaya’s cash reserves shrank to $324 million—down from almost $600 million a year earlier, according to company filings. The company tried to raise new debt to refinance a $350 million convertible bond that was coming due in 2023, according to company filings.

Goldman initially proposed a $500 million loan with a 12.6% yield but found few buyers, according to data provider LevFin Insights. The bank ultimately placed a $350 million secured loan yielding 15.5% with investors. Lenders included Symphony, which has invested in Avaya since before its bankruptcy, the people familiar with the matter said.

Avaya approached JPMorgan in late June to raise additional funds, according to one of the people. The bank placed a $250 million secured convertible bond. Investors included Brigade, the people said.

During the marketing process, Avaya executives told lenders that the company was on track to hit its earnings guidance, some of the people familiar with the matter said.

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The company had set Ebitda guidance of about $145 million for the quarter ended June 30 but cut that to between $50 million and $55 million on July 28. (Ebitda refers to earnings before interest, taxes, depreciation and amortization.) Avaya reported $54 million of Ebitda for the quarter on Tuesday, a figure that barely covers the quarterly interest expenses it disclosed in recent earnings reports.

“It is a surprising outcome for a company that priced $600 million of fresh capital…just four weeks ago,” said

Lance Vitanza,

a stock analyst at Cowen Inc. “It may be too late to accomplish much without radically restructuring Avaya’s balance sheet.”

The newly issued loans were quoted around 65 cents on the dollar Tuesday, down from 87 cents in late July, according to Advantage Data. The new convertible bond is likely to trade at similar prices in the near future, Mr. Vitanza said.

Losses have been heavier for owners of Avaya stock, which fell to as low as 82 cents last week from around $2.50 in early July and about $10 at the start of May. Avaya shares fell 46% Tuesday to 61 cents.

Alexander Gladstone and Andrew Scurria contributed to this article.

Write to Matt Wirz at matthieu.wirz@wsj.com

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Business

AT&T earnings were ‘actually good’ despite stock selloff, says analyst

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AT&T Inc.’s shares fell sharply Thursday after the telecommunications giant cut its free-cash-flow forecast for the year, but one analyst said the latest report wasn’t all bad.

In fact, LightShed Partners analyst Walt Piecyk titled his research note: “AT&T’s Q2 Was Actually Good. Here’s Why.”

Admittedly, AT&T’s
T,
-7.62%
management team didn’t win points from Piecyk for its handling of cash-flow forecasting over the past few months. Piecyk recalled flagging issues with AT&T’s older free-cash forecast back in March, namely a “liberal use of rounding, aversion to simply stating a cash tax estimate for presumably political reasons, and ultimately the use of working capital and DirecTV distributions in their free-cash-flow presentation.”

AT&T said Thursday that various trends contributed to the lowered forecast, including slower customer payment times and higher-than-expected cash expenses related to its own device purchases from suppliers.

“It’s startling that the stock would sell off this steeply on working capital, but management is largely to blame,” Piecyk wrote. “Free-cash-flow guidance should not be this complex and investors shouldn’t include ephemeral working capital benefits in their calculations.”

Elsewhere, however, he saw positives in the report. AT&T’s free-cash-flow metric is important to investors because the company pays a large dividend, but Piecyk doesn’t think that the company will need to cut its dividend any more.

“Its core business is performing well and the 5G capex cycle should be winding down,” he wrote. “In 2023, we believe AT&T can generate over $12 billion of free-cash flow. The full-year benefit of the dividend cut means that $12 billion covers ~$8.2 billion of expected dividend payments,” before taking into account working-capital impacts or about $3 billion in anticipated DirecTV distributions.

Piecyk also had an upbeat view on the company’s wireless performance, especially in light of investor debate about the company’s pricing and promotional strategies.

“The increased pricing on its rate plans did not spike churn and helped deliver post-paid phone ARPU [average revenue per user] growth for the first time in over two years,” he wrote. “This also sends a signal to the wireless industry that there is pricing power in this market.”

Piecyk sees additional room for the company to grow ARPU as the year progresses.

He acknowledged that “[i]nvestors are understandably concerned that AT&T is buying revenue growth with handset subsidies to both new and existing subscribers” but noted that the company was able to grow wireless earnings before interest, taxes, depreciation, and amortization (Ebitda) in the latest quarter. In addition, the company’s upgrade rate fell relative to a year earlier, suggesting that the upgrade cycle is stretching out.

While AT&T is feeling some pain in its business wireline business, Piecyk was impressed by the performance of the company’s fiber business, with net adds up 25% relative to a year before. “This further validates our industry assumptions of target market share for fiber overbuilders and the increased share that can be obtained in legacy markets,” he wrote.

Overall, Piecyk sees opportunities for AT&T moving forward, especially given what the latest numbers indicated about pricing actions. “We continue to believe wireless operators can increase price and cut costs,” he wrote, including through a potential curtailing of device subsidies.

Piecyk rates the stock a buy with a $26 target price.

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