Target (TGT) reports quarterly earnings Tuesday. Analysts expect revenue of $22.53 billion and eps of $1.38. I expect this to be an important earnings report as management continues to lay out its digital growth strategy. Investors should focus on the following key items.
Will Q4 Become The Equivalent Of “Crop Season?”
When I first saw the $22.53 billion estimate I thought it was a misprint. Apparently, Target’s holiday sales were so strong that the company had to increase its Q4 guidance:
Target Corporation (NYSE: TGT) today announced that its comparable sales in the combined November/December period grew 3.4 percent, compared with the expected range of 0 to 2 percent. Comparable sales across all of the Company’s core merchandise categories – Home, Apparel, Food & Beverage, Hardlines and Essentials – were positive and accelerated from the third quarter, reflecting strong traffic growth, positive store comps and continued strength in digital sales. Target now expects 2017 will be the fourth consecutive year in which its digital sales grow more than 25 percent.
Expect same store sales of 3.4 percent in November/December is downright gaudy compared to the 0.8% figure reported last quarter. Management expects the strong shopping season to push total full-year comparable sales above 1 percent. First of all, it could be a dangerous trend for Target to have to rely on holiday sales or “crop season” to drive an uptick in same store sales. Secondly, while management should be commended for a strong holiday season the question remains, “What happens below the revenue line?”
As more retail sales occur on line that implies lower operating margins for traditional bricks and mortar stores. Target is no different. Last quarter the company’s gross margin ticked down slightly to 29.7% from 29.8% in the year earlier period. Its EBIT margin fell to 5.2% from 6.5% on higher SG&A expense and higher depreciation costs. I would expect more of the same this quarter. Despite the top line growth, shrinking margins imply Target could be running in quicksand for several quarters until it finds the right balance between digital and in-store sales.
Digital Sales Remain Strong
Target’s digital sales growth has been a silver lining. Last quarter digital sales were up 24% versus 26% growth in the year earlier period. Reports suggest digit sales were robust during the holiday season as well. This is important as 100 percent of Target’s 0.8% same store sales growth last quarter came from digital sales; store channel comparable store sales growth was nil. It also suggests the customer experience at Target.com is strong enough to generate repeat business and compete with the likes of Amazon (AMZN). I view Amazon as a technology company and other retailers’ technology has to be on par in order to compete. It appears Target is meeting the challenge.
The company has also taken major steps to enhance digital customers’ experience, which could lead to stickier customer retention. Target has tested and rolled out same-day delivery in four locations in New York. Its recent $550 million acquisition of Shipt – a same-day delivery platform – should allow it to expand same day service and keep pace with Walmart (WMT) and Amazon. It has also rolled out ship-from-store capabilities, which will also allow customers to pick up shipments in-store. This will allow Target to keep pace with other leading retailers, but it could also drive up SG&A costs and/or entice customers to buy more online. Ultimately, these moves should help digital sales remain strong.
Weak Guidance?
After gushing over holiday sales investors and analysts will need to turn their focus to the next quarter. Analysts anticipate sales of $16.51 billion for the quarter-ended April 2018, which implies about 3% growth Y/Y. Even if the company hits its revenue bogey can it meet bottom line results? Target needs to pedal harder to keep its top line from falling. As more of its revenue is generated via digital it implies lower gross margins and higher selling costs to entice and retain customers.
Conclusion
Tomorrow’s earnings results should be strong, but weak guidance could stymie TGT. I rate the stock a hold into earnings.
We saw a meaningful increase in the percent of our sales at regular price, reflecting the benefit of our work to communicate value more clearly and provide our guests confidence that Target assortment is priced right daily.
Rolled out own brands
We rolled out four new owned brands across our home and apparel categories, all of which are off to a great start. And we generated an unprecedented amount of buzz when we announced an amazing new designer partnership with Chip and Joanna Gaines called Hearth and Hand with Magnolia, which launched last week.
Actor Chad L. Coleman will host Trump And The Global Economy February 6, 2018 in Brooklyn.
The panel will include Christopher Townley (land baron), Reverend Conrad Tillard (activist, WHCR 90.3 FM), Wuyi Jacobs (AfrobeatRadio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The event will take place at South Oxford Space in Fort Greene, Brooklyn from 6PM – 8PM. Tickets are available on Eventbrite. Come early and bring friends.
Mr. Coleman is best known for his role as fan-favorite ‘Tyreese’ in one of the most popular cable series of all time, the Golden Globe® nominated series “The Walking Dead” ‘and as the reformed criminal “Dennis ‘Cutty’ Wise” in Emmy® award nominated HBO drama series “The Wire.” Coleman currently stars in the highly- new, hour-long FOX comedy series, “The Orville” playing the role of ‘Klyden.’ Created, executive produced, and starring Seth MacFarlane (“Family Guy”) and directed by Jon Favreau (IRON MAD, THE JUNGLE BOOK), the comedic science fiction series set 300 years in the future and follows the adventures of the U.S.S. Orville, a not-so-top-of-the-line exploratory ship in Earth’s interstellar fleet. The first season premiered on September 10th on FOX and has been picked up for a second season. ‘
According to Ralph Baker who founded Trump And The Global Economy:
“We are excited to work with Chad to help spread the word about Trump And The Global Economy. These are trying times we live in and the community is dependent on artists like Mr. Coleman to continue to tell our stories through their music, film, plays, books, etc. Brooklyn has a Rich, vibrant, art community. We would love for the art world and the broader community come out to network and take in what the panel has to say.”
The town hall brings together a cross-section of individuals to discuss everything from President Trump’s policies on economics, immigration, and foreign affairs, to what his election says about America. Individuals on the front lines will bring you real information about the Trump administration that impacts the community.
The most recent Trump And The Global Economy town hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Mr. Jacobs and Mr. Baker. The event was well-received by the community. We parsed through President Trump’s proposed tax plan and high net worth individuals could potentially game the system by shifting income around. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
The June 27 2017 event included Mr. Tillard, John McLaughin, who did the polling for President Donald Trump during his presidential election, Mr. Jacobs and Mr. Baker. Trump And The Global Economy is a quarterly event and is fast becoming the “must see” event in Brooklyn.
