Can Target Beat Estimates In Q4?

by Trefis Team
-3.82%
Downside
84.21
Market
80.99
Trefis
TGT
Target
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Target (NYSE: TGT) is scheduled to announce its fiscal fourth quarter results on Tuesday, March 5. The retailer has been overhauling its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management. In fact, the results of Target’s business transformation have started to show in the company’s financials from Q1 2018 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 fact, Target’s stock fluctuated between $66 to $89 over the course of 2018, largely due to growing margin concerns – despite otherwise strong financial results.

Our $83 price estimate for Target’s stock is almost 10% ahead of the current market price. We have created an interactive dashboard – Can Target End 2018 On A Strong Note? – 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 and see all Trefis Consumer Discretionary company data here.

Q4 Expectations

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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