Target Q4 Earnings Preview: Holiday Season Decline Likely To Drive Mixed Results

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Target (NYSE: TGT) is scheduled to announce its fourth quarter results on Tuesday, February 28. The company reported better than expected results in the third quarter, as both its revenues and earnings per share came in ahead of expectations. However, the company’s revenue declined 7% year-over-year (y-o-y) to $16.4 billion, primarily due to the sale of its pharmacy business to CVS, investments in promotions and increased digital shipping expenses. It also posted adjusted earnings of $1.04 per share, which was above the high end of the company’s guidance.

The retailer’s total sales decreased 4.9% y-o-y during the 2016 holiday season (November and December), driven by early season softness and disappointing traffic, partially offset by continued strength in the company’s signature categories – particularly kids, women’s apparel, home and toys – and strong Black Friday sales. Although Target began the holiday season with solid sales on Black Friday, but slowed going into the Christmas holiday. This slowdown in sales has likely been driven by growing competition from internet retailers, food deflation, a stronger dollar, and continued declining traffic at Target’s stores on the back of transition of its in-store pharmacies to CVS. In addition, the food-at-home (grocery store or supermarket food items) consumer price index (CPI) fell 0.2% from November to December and was also 2% lower than last December. ((Summary Findings Food Price Outlook, USDA, Dec 2016))

Target’s overall comparable sales declined 1.3% y-o-y during the holiday season period. In fact, comparable sales in Target stores declined more than 3% y-o-y in the 2016 holiday season. Although Target’s digital comparable sales grew more than 30% y-o-y in the same period, the costs associated with the accelerated mix shift between the stores and digital channels and a highly promotional competitive environment could negatively impact the company’s fourth quarter margins and earnings per share (EPS). In addition, comparable sales in the Electronics and Entertainment segment declined in the high single digit range, while comparable sales in Food and Essentials declined in the low single digit range in the November/December period.

 

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Future Outlook

Target updated its fourth quarter and full-year 2016 guidance as a result of the company’s softer-than expected sales performance. It now expects its fourth quarter comparable sales to range between (-1.5)% to (-1.0)%, compared with the prior guidance range of -1% and 1%. Altogether, in the fourth quarter, the company expects to generate both GAAP EPS from continuing operations and adjusted EPS in the range of $1.45 to $1.55, compared with prior guidance of $1.55 to $1.75. In addition, Reuters’ compiled analyst estimates forecast revenues of $20.7 billion and earnings of $1.51 per share in Q4.

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For full year 2016, the company lowered its earnings guidance to $5.00 to $5.10, compared to prior guidance of $5.10 to $5.30.

See our complete analysis for Target  

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