Target’s 2017 In Review
Target (NYSE: TGT) has seen a better-than-expected performance thus far this year, as both its revenue and earnings per share (EPS) came in ahead of market expectations so far. However, Target’s stock is down almost 10% this year. The company is in a transitional phase right now, trying to overhaul its business by investing more than $2 billion this year. The company’s strategy also includes renovating stores, supply chain improvements and increased promotions, all at an estimated cost of $7 billion over the next 3 years. However, it is going to take a lot of effort on its part to keep up with Amazon (not to mention Wal-Mart, which has spent billions on e-commerce initiatives and acquisitions).
In the first nine months of 2017, Target’s revenue grew 1% year-over-year (y-o-y) to $49 billion, primarily due to lower comparable store sales, partially offset by a slightly higher store count. Notably, the retailer’s digital sales accounted for 4.3% of total sales in this period, compared to 3.5% in the same period in the prior year. Target also posted adjusted earnings of $3.34 per share, down 6% y-o-y. Factors such as higher employee wages, free delivery, and promotional activity continue to be a drag on Target’s bottom line. We expect the same factors to impact the company’s next quarter earnings as well.
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Target’s gross margin was 30.1%, down 30 basis points in the first three quarters of 2017. This slip was due to increased fulfillment costs resulting from the growth in the company’s digital sales. On the cost side, selling and general administrative (SG&A) expenses grew 3% y-o-y, due to an increase in compensation expense, reflecting investments in store hours, wage rates and team member incentives.
Boost In Traffic, Digital Sales
Target reported a 0.3% y-o-y increase in its comparable sales in the first nine months of 2017. Among the components of comparable sales, the number of transactions grew by 0.9% y-o-y and the average transaction amount declined 0.6% y-o-y. The company’s store comparable sales were negative in this period, primarily because of a 2.2% decline in comparable store sales in Q1. However, Target’s store comparable sales grew positive in Q2, followed by flat sales in Q3, which shows that the company’s strategy of investing in its stores to grow traffic is working out, at least to a degree. On the other hand, Target was able to grow its digital comparable sales by 0.9% in the nine months of 2017, which suggests that the company’s digital initiatives are resonating well with the customers.
Future Outlook
In the fourth quarter, the company expects to generate both GAAP EPS from continuing operations and adjusted EPS in the range of $1.05 to $1.25, compared to a consensus estimate of $1.24. The company also expects to see continued pressure on its EBIT due to ongoing investments in both digital and physical stores. For the full year 2017, Target expects its adjusted EPS to range between $4.40 to $4.60.
Our $59 price estimate for Target’s stock is around 10% below the current market price.
See our complete analysis for Target
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