Target Q3 Earnings Preview: Store Initiatives And Product Launches Likely Drove Another Impressive Quarter
Target (NYSE:TGT) is scheduled to release its earnings for the third quarter on November 18th [1]. (Fiscal years end with January.) Continuing its streak of better-than-expected earnings in 2014, the company has had a great run this fiscal year. The combined earnings per share in the first two quarters came in at $2.32 [2], exceeding consensus estimates by more than 8%. Following this, the company also raised its full-year guidance to a range of $4.60 to $4.75, compared with prior guidance of $4.50 to $4.65.
Given all the new initiatives Target has taken in the last three months, the company likely maintained or even improved sales growth. However, in the light of rising competition among retailers, Target stepped up the ante by announcing policies such as an extended price match guarantee and free holiday shipping. While these steps might have led to increased costs, increased sales kept Target’s earnings growth intact, keeping it on track for a positive earnings surprise.
Below, in this article, we take a closer look at some of the trends that likely affected Target’s earnings this quarter. Our price estimate for Target stands at $79, about 10% above the current market price.
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Product Launches And Store Initiatives Likely Drove Top-line Growth
Earlier in October, Target became the only second non-Apple store to officially sell the Apple Watch, after Best Buy (NYSE:BBY). Though a month behind Best Buy, the company made the in-demand product available at all of its stores before the end of October. Given that the iWatch is expected to generate sales of approximately $1 billion, as estimated by Juniper Research, [3] this offers a huge opportunity for retailers to cash in on. Moreover, the launches of flagship devices from both Google and Apple in September likely provided more momentum to Target’s revenues this quarter.
On the other hand, the company has been working on improving its in-store experience to attract more traffic to its stores One such example is the its efforts in reinventing product presentation in the home decor category, which accounted for 17% of the retailer’s $73 billion sales in 2014. The company came up with layouts that it calls vignettes, which are used to showcase products in showroom-like areas rather than just stacking up items in shelves. This helps in enhancing the in-store experience for customers and makes them visit physical stores more often versus making purchases online, where Target is less likely to win the sale.
Margins Could Be Under Pressure Due To Increased Competition
At the same time, it wont be easy to win store visiting customers. As retail sales growth remained soft for the most part of this year, retailers have taken to more aggressive strategies to capture sales. As a result, price match guarantees have become a commonplace among retailers.
Target raised the ante by renewing its price match policy to also include products on their website and added 24 additional retailers that they’d match on price, including online rivals. As other competing retailers also have their own version of such policies, it has resulted in dangerous levels of price competition. Fortunately, though, Target’s renewed focus on its signature categories such as baby products, fashion, furniture, etc., has helped it regain lost brand value. Therefore, the affect of price competition will be limited to fewer categories (where it does not have product differentiation), giving the company’s margins some downside protection.
Overall, we believe growth in the Target’s revenues outpaced any increase in costs during this quarter, keeping it on track to report a healthy level of earnings growth. The company has guided for a Q3 earnings per share of $0.79 to $0.89 compared with $0.79 in third quarter 2014. Reflecting the positive factors discussed above, the consensus EPS estimate for Q3 stands at $0.86 ((Target Earnings Forecast, Nasdaq)). Stay tuned for our coverage of Target’s Q3 earnings release.
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