Can Target End The Year On A Strong Note?

by Trefis Team
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Target‘s (NYSE: TGT) earnings per share and revenues missed market expectations in its fiscal third quarter results. In Q3, Target’s revenue increased 6% year-over-year (y-o-y) to $17.8 billion, primarily due to a strong 5.1% increase in comparable sales. Among the components of the reported comparable sales, traffic grew a strong 5.3% y-o-y and the average transaction amount decreased 0.2% y-o-y. In addition, the company’s digital comparable sales grew 1.9% y-o-y, while store comparable sales grew a robust 3.2% 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 adjusted EPS grew more than 20% y-o-y during this period. Target benefited from its high margin categories – home and apparels. The company is 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.

Our $83 price estimate for Target’s stock is almost 20% ahead of the current market price. We have created an interactive dashboard Can Target Beat Estimates In Q4? 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.

Q4 Expectations

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 Q3, Target’s gross margin was 28.7%, down 90 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. This mark also fell short of consensus estimates of 29.7%.  On the cost side, selling, general and administrative (SG&A) expenses grew 5% 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 Q4 as well.

We also expect Target to continue to post an increase in its revenue growth rate in Q4. On the comparable sales line, the retailer expects fourth quarter growth of around 5% consistent with the company’s Q3 performance. In addition, Target expects a slight decline in operating income in Q4.

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. The company continues to expect full-year adjusted EPS of $5.30 to $5.50 and GAAP EPS of $5.41 to $5.61.

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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