Target Begins Fiscal 2019 on A Strong Note

Target (NYSE: TGT) reported solid fiscal first quarter results, as both its revenues and earnings per share came in ahead of market expectations. In Q1 2018, Target’s revenue grew 5% year-over-year (y-0-y) to $17.6 billion, driven by a strong 4.8% increase in comparable sales. Among the components of the reported comparable sales, traffic grew 4.3% y-o-y. Further, the company’s digital comparable sales grew 2.1% y-o-y, while store comparable sales grew a robust 2.7% 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 15% y-o-y during this period. 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 $81 price estimate for Target’s stock is slightly ahead of the current market price. We have created an interactive dashboard – What Has Driven Target’s Recent Results, and What To Expect Going Forward? – which outlines key takeaways from Q1 earnings and Q2 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 more Trefis Consumer Discretionary company data here.

Q2 Expectations

• We expect Target to continue to post an increase in its revenue growth rate in Q2. In terms of comparable sales, the retailer expects second quarter growth in the low-to-mid-single digits.
• In addition, Target also expects to see a mid-single-digit increase in operating income. It also expects its GAAP and Adjusted EPS to range between $1.52 and $1.72.
• In Q1 fiscal 2019, Target’s gross margin was down 20 basis points, due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling, general and administrative (SG&A) expenses grew 3% 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 2019.
• 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.

Fiscal 2019 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 remodel close to 300 stores this year.
• The company has maintained its full-year guidance, reflecting no fear in the face of 25% tariffs on footwear and apparel imports from China.
• For the full year, Target is guiding for comp sales growth in the low-to-mid-single digits, reflecting the combination of increased traffic to its physical stores, strong market share gains in digital, and greater adoption of its fulfillment capabilities.
• Further, the company continues to expect its adjusted EPS of $5.75 to $6.05 for the full year.
• Target is focused on controlling costs to offset the increased investments in the growing digital business. With that discipline in 2019, the company plans to improve its operating margin to mid-single-digits.

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