Earnings Review: Target Continues To Impress, Increases Guidance Again

Target (NYSE:TGT) released results for Q2 fiscal 2015 on August 19. The company reported impressive results for the second quarter in a row, even as the retail environment remains challenging, especially in the U.S. Adjusted earnings per share for the quarter stood at $1.22, beating analyst expectations of $1.11. The improved performance over the quarter was primarily attributable to higher traffic both in-store and through digital channels, driven by an extremely positive response to its signature categories. ^[1] The continued cost-cutting measures undertaken by the company are also paying off and helped improve margins over the quarter.

Driven by improved financial results in the quarter, the company has raised its full-year EPS guidance again. At the end of the first quarter, the company increased its EPS guidance marginally, and raised it by another 10 cents this time around. ^[1]

Our price estimate for Target stands at $79, which is slightly below the current market price.

See our complete analysis for Target

Target’s Signature Categories Are Driving Overall Growth

The company’s focus on its signature line is helping it outperform market expectations. The affordable fashion at Target is helping attract a larger number of customers than in previous years. Consequently, during the quarter, Target not only saw a rise in the number of customers, but it also witnessed customers spending more as compared to last year. The number of transactions increased 1.6%, and the average transaction value increased 0.8%, primarily due to the positive customer response to the signature categories. To put this into perspective, sales growth in the signature categories outpaced overall sales by two times in the first quarter. These categories continued to gain steam, and in the second quarter witnessed sales growth that was three times faster than overall sales growth. ((Target Lifts Earnings Outlook, Wall Street Journal))

Target’s overall comparable sales increased 2.4% over the quarter, driven by a larger number of transactions and higher average amount per transaction. The products that dominated the sales mix this quarter, including the clothing and home décor items from its signature collection, typically also bring in higher margins. ^[2] This, along with the company’s cost cutting measures, helped grow net earnings at Target by more than 2.2x on a year-over-year basis. The company also witnessed improved margins this quarter as the need for promotions and discounts on its offerings declined, with traffic remaining strong. Gross margins in the quarter improved by over 40 basis points on a year-over-year basis. ^[1]

Digital Sales, REDcard Penetration Continue To Grow 

Digital sales witnessed 30% growth in Q2 2015. The contribution of digital channels to overall sales increased by 50 basis points on a  year-over-year basis. Of the company’s recorded 2.4% comparable sales growth in the quarter, 0.6% was attributable to digital channels, showing that the company’s digital channel is continuing to grow. ^[1] The company continues to successfully grow its omni-channel model. Moving forward, the digital channel is expected to cater to customers’ needs even more directly, through measures such as personal recommendations to customers through its “Cartwheel” coupon and offer digital application.

It is also important to note that the company witnessed higher REDcard penetration in this quarter. REDcard buyers have a tendency to spend more than regular customers due to offers and discounts related to purchases made with the card. REDcard penetration grew by 110 basis points on a year-over-year basis, and also contributed to the increase in average transaction amount this quarter. ^[1]

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1. Target Reports Second Quarter 2015 Earnings, Target [↩] [↩] [↩] [↩] [↩]
2. Target Lifts Earnings Outlook, Wall Street Jounral [↩]