What To Expect From Target’s Q3

by Trefis Team
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Target (NYSE: TGT) is scheduled to announce its fiscal third quarter earnings on Tuesday, November 20. The company has had a solid fiscal year so far, as both its earnings and revenues came in ahead of market expectations for the first half. Target has been looking to overhaul its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management, since the beginning of 2017. In the first six months of fiscal 2018, Target’s revenue increased 5% year-over-year (y-o-y) to $35 billion, primarily due to a strong 4.8% increase in comparable sales. Among the components of the reported comparable sales, traffic grew a strong 5.0% y-o-y and the average transaction amount decreased 0.3% y-o-y. In addition, the company’s digital comparable sales grew 1.3% y-o-y, while store comparable sales grew a robust 3.4% y-o-y. The fact that the company has been able to grow its store comparable sales, despite significant competitive pressure, suggests that its initiatives are resonating well with customers. In terms of the bottom line, the company’s GAAP EPS from continuing operations and adjusted EPS grew more than 15% y-o-y during this period. Target benefited from strength in the home, apparel, toys, baby and electronics categories.

Our $83 price estimate for Target’s stock is slightly below the current market price. We have created an interactive dashboard Can Target Keep Beating Estimates In The Second Half of 2018 which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Q3 Expectations

Target saw its stock decline by nearly 10% in 2017, but the stock price has increased by around 25% over the course of 2018. The results of Target’s business transformation have started to show in the company’s financials from Q1 on. However, the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, is leading to shrinking margins. In Q2, Target’s gross margin was 30.3%, down 10 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling, general and administrative (SG&A) expenses grew 14% y-o-y, due to an increase in compensation expenses, reflecting investments in store hours, wage rates and team member incentives. Going forward, we expect this margin pressure to continue in Q3 as well, due to higher sales expectations in lower-margin categories.

We also expect Target to continue to post an increase in its revenue growth rate in Q3. In addition, the retailer expects a slight increase in its SG&A expense rate forecast and a small amount of rate favorability on the D&A expense line, resulting in a 20 to 30 basis point decline in its operating margin for the third quarter.

Fiscal 2018 Outlook

Target plans to leverage its network of stores, and Shipt’s technology platform and community of shoppers, to add same-day delivery to its capabilities. In addition, the company is looking to open 30 small-format stores and remodel close to 325 stores this year. For the full year, the retailer is now expecting an operating margin decline of 30 to 40 basis points on a higher base of expected sales. These expectations translate to a full year outlook for adjusted EPS of $5.30 to $5.50, compared with the prior range of $5.15 to $5.45.

We forecast Target’s total revenue for fiscal 2018 by estimating the number of stores, square footage per store and revenue per square foot in fiscal 2018. We expect Target’s 2018 store count in the U.S. to be over 1840, with an average square footage per store of 306k and revenue per square foot of $132, translating into around $75 billion (+4% y-o-y) in domestic revenues in fiscal 2018.

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