Earnings Beat in The Cards For Target’s Stock?

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Target (NYSE: TGT), the second-largest discount chain in the U.S., is scheduled to report its fiscal fourth-quarter results on Tuesday, March 1. We expect Target’s stock to likely trade higher due to revenue and earnings beating market expectations. The company is doing an excellent job adjusting to changes in consumer preferences with its drive-up, pickup in-store, and same-day delivery via Shipt services. In fact, the drive-up feature grew 500% in the third-quarter of 2020 and then another 80% on top of that in Q3 2021. It was by far Target’s most popular same-day service. The retailer pointed to continued strength in same-day digital fulfillment services, in-store sales, and double-digit growth in all five of its core merchandising categories in Q3. And, we expect this trend to continue into Q4 as well. Looking ahead, Target expects high single-digit to low double-digit growth in comparable sales in Q4. It also continues to expect its full-year operating income margin to be 8% or higher for the full year.

Our forecast indicates that Target’s valuation is around $255 per share, which is almost 28% higher than the current market price. Look at our interactive dashboard analysis on Target’s Earnings Preview: What To Expect in Q4? for more details.

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(1) Revenues are expected to be slightly ahead of consensus estimates

Trefis estimates Target’s Q4 2021 revenues to be around $31.9 Bil, marginally ahead of the consensus estimate. In Q3, the company’s revenues grew a strong 13.3% year-over-year (y-o-y) to $25.6 billion, on the back of U.S. comparable sales rising 12.7% in Q3 on top of the 20.7% gain last year. The company noted the comparable-sales growth was driven entirely by traffic, up 12% y-o-y, in the third quarter. To add to this, the company’s store comparable sales increased 10% while digital comparable sales increased 29% y-o-y. For full-year 2021, we expect Target Revenues to grow 14% y-o-y to $107 billion.

Target’s gross margin rate was 28.0% in Q3 vs. 30.6% last year. The gross margin rate reflected pressure from higher merchandise and freight costs, increased inventory shrink, and increased supply chain costs from increased compensation and headcount in the company’s distribution centers. Those pressures were partially offset by a slight benefit from a favorable category mix.

 2) EPS likely to be comfortably ahead of consensus estimates

Target’s Q4 2021 earnings per share (EPS) is expected to be $3.02 per Trefis analysis, comfortably higher than the consensus estimates. Target’s third-quarter GAAP earnings per share were about 52% y-o-y at $3.04, while adjusted earnings per share were up about 9% y-o-y to $3.03. The company’s net income in the first nine months of 2021, totaled about $5.4 billion (or $10.87 EPS) compared to about $3 billion (or $5.91) in the same period in 2020. Target has earned an operating income of $6.8 billion in the nine months ended October – despite higher marketing and wage expenses – and is up 46% y-o-y. More impressively, the $6.8 billion would be Target’s highest operating income reported in the past decade, and it still has another quarter left in the year.

(3) Stock price estimate higher than the current market price

Going by our Target Valuation, with an adjusted EPS estimate of around $13.32 and P/E multiple of 19.1x in fiscal 2021, this translates into a price of $255, which is 28% higher than the current market price.

It is helpful to see how its peers stack up. TGT Peers shows how Target compares against its peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Feb 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 TGT Return -10% -14% 176%
 S&P 500 Return -3% -8% 96%
 Trefis MS Portfolio Return -1% -11% 251%

[1] Month-to-date and year-to-date as of 2/28/2022
[2] Cumulative total returns since the end of 2016

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