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Target (TGT) Q1 Earnings Beat: Is Stock Ready for a Leap?

Zacks

Target Corporation TGT commenced fiscal 2017 on a high note with both top and bottom lines surpassing expectations. As a result, shares are up roughly 4% during pre-market trading hours. Better-than-expected results provided much needed impetus to the stock that came under pressure after dismal performance in the final quarter of fiscal 2016.

So far in the year, the stock has plunged 24.5% and underperformed the Zacks categorized Retail-Discount & Variety industry that witnessed a meagre decline of 3.1%. However, in the past one month, Target’s shares regained some lost ground and rose 1.7%. Management informed that the quarter did witness a sluggish start but it gradually picked up in the later part, primarily in the month of March.

Let’s Unveil the Picture

The company posted first-quarter adjusted earnings of $1.21 per share that came ahead of the Zacks Consensus Estimate of 89 cents and also outperformed management’s previous provided guidance range of 80 cents to $1.00 per share. The company generated total sales of $16,017 million that also surpassed the Zacks Consensus Estimate of $15,640 million. However, we noted that both the top and bottom lines continues to decline year over year, and this is still a cause of worry.


Earnings per share tumbled 6.1% in the quarter under review, after falling 4.6% in the preceding quarter. The case was similar for total sales that edged down 1.1%, following declines of 4.3%, 6.7%, 7.2% and 5.4% witnessed in the fourth, third, second and first quarters of fiscal 2016, respectively. Notably, the rate of decline has decelerated sharply.

Nevertheless, we believe that the initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores, bode well for this Minneapolis-based company. Target is investing in merchandise categories such as Style, Baby, Kids and Wellness. It intends to launch new brands and be more competitive in terms of price.

Comparable sales for the quarter decreased 1.3%. The number of transactions fell 0.8%, while the average transaction amount declined 0.6%. Comparable digital channel sales surged 22% and added 0.8 percentage points to comparable sales.

Gross profit decreased 2.5% to $4,883 million, while gross margin contracted 40 basis points to 30.5%. Operating income fell 11% to $1,178 million, while operating margin shriveled 80 basis points to 7.4%.

Target’s credit card penetration expanded 60 basis points to 11%, whereas debit card penetration increased by 50 basis points to 13.5% during the quarter. Total REDcard penetration climbed to 24.5% from 23.4% in the year-ago quarter.

Other Financial Details

During the quarter, Target repurchased shares worth $305 million and paid dividends of $332 million. The company ended the quarter with cash and cash equivalents (including short-term investments) of $2,680 million, long-term debt and other borrowings of $11,086 million and shareholders’ investment of $11,021 million.

Target Corporation Price, Consensus and EPS Surprise

Target Corporation Price, Consensus and EPS Surprise | Target Corporation Quote

A Glance at the Outlook

During second-quarter fiscal 2017, management expects a low single digit decline in comparable sales and projects adjusted earnings in the range of 95 cents to $1.15 per share.

For fiscal 2017, Target continues to anticipate a low-single digit decline in comparable sales but now envisions adjusted earnings to come ahead of the midpoint of the previously provided guidance range of $3.80–$4.20 per share on account of better-than-expected quarterly performance.

The current Zacks Consensus Estimate for the second quarter and fiscal 2017 stands at 99 cents and $3.99, respectively.

Zacks Rank & Key Picks

Target carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include The Children's Place, Inc. PLCE, Big Lots, Inc. BIG and Burlington Stores, Inc. BURL all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Children's Place delivered an average positive earnings surprise of 39% over the trailing four quarters and has a long-term earnings growth rate of 8%.

Big Lots delivered an average positive earnings surprise of 83.1% over the trailing four quarters and has a long-term earnings growth rate of 13.5%.

Burlington Stores delivered an average positive earnings surprise of 26.3% over the trailing four quarters and has a long-term earnings growth rate of 15.9%.

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