A month has gone by since the last earnings report for Target (TGT). Shares have added about 0.8% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Target due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Target Q2 Earnings & Sales Beat, FY18 View Up
Target Corporation’s strategies to adapt to the fast-changing retail landscape is surely paying off well. This Minneapolis-based company impressed investors with its second-quarter fiscal 2018 performance, wherein both the top and bottom lines not only surpassed the Zacks Consensus Estimate but also continues to improve year over year. The main show of the quarter was the company’s strong traffic growth. Not surprisingly, all these encouraged management to raise fiscal 2018 earnings view.
Let’s Delve Deep
After witnessing two straight quarter of negative earnings surprises, Target posted an earnings beat during the second quarter. The company reported adjusted earnings of $1.47 per share that topped the Zacks Consensus Estimate of $1.40 and also came near the high-point of the earlier provided guidance range of $1.30-$1.50 per share.
Notably, the bottom line improved 19.8% from the prior-year period. This year-over-year growth can be attributable to higher sales and fall in interest expense as well as share repurchase activity that to an extent offset rise in cost of sales and higher SG&A expenses.
The company generated total revenue of $17,776 million that came ahead the Zacks Consensus Estimate of $17,335 million for the sixth straight quarter and increased 6.9% from the year-ago quarter. Sales rose 7% to $17,552 million, while other revenue remained almost flat at $224 million.
Target is deploying resources to enhance omni-channel capacities, coming up with new brands, remodeling or refurbishing stores, and expanding same-day delivery options. Target has undertaken rationalization of supply chain with same-day delivery of in-store purchases along with technology and process improvements. The company made significant headway in the same-day delivery race by acquiring Internet-based grocery delivery service Shipt to provide same-day delivery of groceries, essentials, home, electronics as well as other products.
Meanwhile, comparable sales for the quarter increased 6.5% compared with 1.3% growth witnessed in the year-ago period. The number of transactions rose 6.4%, while the average transaction amount jumped 0.1%. Comparable digital channel sales surged 41% and added 1.5 percentage points to comparable sales. Comparable store sales increased 4.9% during the quarter.
Gross margin contracted 10 basis points to 30.3% due to digital fulfillment costs, partly mitigated by the benefit of merchandising strategies comprising cost containment efforts, improve pricing and promotions. Operating margin shriveled 20 basis points to 6.4%.
Target’s debit card penetration contracted 20 basis points to 13%, while credit card penetration fell 70 basis points to 10.9%. Total REDcard penetration declined to 23.9% from 24.8% in the year-ago quarter.
Other Financial Details
During the quarter, Target repurchased shares worth $431 million and paid dividends of $330 million. The company still had about $2.3 billion remaining under its $5 billion share buyback program. The company ended the quarter with cash and cash equivalents of $1,180 million, long-term debt and other borrowings of $10,108 million and shareholders’ investment of $11,167 million.
In the quarter under review, the company made capital investments of little more than $1 billion, and remains on track to invest roughly $3.5 billion during fiscal 2018.
A Glance at the Outlook
Management now anticipates comparable sales growth for the third quarter and second half of fiscal 2018 to be in line with 4.8% increase registered in the first half.
Target now envisions third quarter adjusted earnings in the band of $1.00-$1.20 per share, up from 90 cents reported in the year-ago period. For fiscal 2018 earnings are projected to be between $5.30 and $5.50 per share, up from $5.15-$5.45 guided earlier.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
At this time, Target has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.
Target has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.