Why Target’s Profits Are Likely To Grow In 2020 Despite Steadily Growing Expenses

by Trefis Team
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Target‘s (NYSE: TGT) total expenses have grown from $67.6 billion in 2016 to $72.4 billion in 2018. We expect these expenses to grow to 74.4 billion in 2019. As a percentage of revenues, expenses grew from 69.9% in 2016 to 70.7% in 2018. However, we expect it to decline to 68.7% in 2019. Cost of Sales, which includes freight expenses and distribution costs, is the biggest expense head for Target. These are expected at $54.1 billion in 2019, making up 73% of Target’s $74.4 billion in 2019 expected total costs. Target’s selling costs, referred to as the selling, general and administrative expenses (SG&A), include overhead and other management costs, and are expected at $16.5 billion in 2019, making up 22% of Target’s expected total costs. 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, which explains the growth in total expenses.

Target’s net income margins have grown from 1.6% in 2016 to 2.9% in 2018, and are expected to grow further to 4.1% in 2019. Earnings margin was boosted by faster revenue growth and stable cost of sales, which has in turn also led to a ~70% growth in share price during this period.

We have created an interactive dashboard on Target’s Expenses: How Much Does Target Spend? where we look at how the company’s key expense components have trended and the key reasons for the change.

1. Cost of Sales :

Cost of Sales is expected to increase from $51.1 Bil in 2017 to $54.1 Bil in 2019, driven by increased supply chain and digital fulfillment costs. As Cost of Sales is growing at a slower rate than Revenues, the Gross Profit Margin will grow from 29.7% to 31.3% over the same period.

 2. Operating Expenses Are Expected to Increase From $17.4 billion in 2017 to $18.9 billion in 2019, Driven By (A) $1.4 Billion Increase In SG&A Expenses and (B) $140 Million Increase In DA Expenses

 (A) SG&A expenses are expected to increase from $15.1 billion in 2017 to about $16.5 billion in 2019 as Target is likely to be investing in store wages and marketing expenses. However, lower impairment charges in 2019 and broad-based cost savings could offset this increase. As a % of revenue, SG&A expenses could likely grow marginally from 20.8% in 2017 to 20.9% in 2019
(B) DA expenses are expected to increase from $2.2 billion in 2017 to about $2.4 billion in 2019 due to higher accelerated depreciation for planned store remodels. As a % of Revenue, DA expenses could likely decrease slightly from 3.1% in 2017 to 3% in 2019.
3. Target’s Non-Operating Income could decline from $594 million in 2017 to $380 million in 2019 driven by higher interest expenses relating to more long-term debt, partially offset by higher interest and dividend income from its investments
4. Target’s Income Tax Expense could grow from $720 million in 2017 to more than $1 billion in 2019, with an Effective Tax rate to remain around 25% through this period.

Additional details about how How Does Target’s Key Operating Metrics Compare With Walmart(US)? are available in our interactive dashboard.

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