Target Lifts Q4 Guidance On The Back Of A Strong Holiday Season

Target (NYSE: TGT) significantly raised its guidance for the fourth quarter and full year 2017, on the back of a very strong holiday season and the recent federal tax reform. The company reported a comparable sales growth of 3.4% for the two-month holiday period. In fact, comparable sales across all of the core merchandise categories – Home, Apparel, Food & Beverage, Hardlines, and Essentials – were positive in this period. Accordingly, the company raised its adjusted EPS guidance to range between $1.30 to $1.40, compared to previous guidance of $1.05 to $1.25 for Q4. In addition, the retailer also expects comparable sales growth of 3.4%, compared to the previous comparable sales growth of 0% to 2%. Also, the company expects its new and less mature stores to contribute approximately 70 basis points to Target’s fourth-quarter sales growth, which is expected to grow more than 9% year-over-year. For the full-year 2017, Target expects its adjusted EPS guidance to range between $4.64 to $4.74, from a prior range of $4.40 to $4.60.

Transition Efforts Appear To Be Working

Given Target’s expected growth of 9% in Q4, along with positive comparable sales and mid-single-digit earnings growth, all suggest that the company’s turnaround efforts are likely working for it. Target 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. In fact, the company expects to invest around $7 billion over the next 3 years for the same purpose.

Target’s struggle to grow its comparable store sales has been the primary investor concern for the past few quarters, which was largely driven by declining traffic and lower average transaction amounts at its brick and mortar stores. In the first nine months of 2017, Target’s store comparable sales grew negative, primarily because of a 2.2% decline in comparable store sales in Q1. However, the company’s store comparable sales grew positive in Q2, followed by flat sales in Q3, which shows that the company’s strategy of investing in its stores to grow traffic is working out, at least to a degree. On the other hand, Target was able to grow its digital comparable sales by 0.9% in the nine months of 2017, which suggests that the company’s digital initiatives are resonating well with customers.

Looking Forward To 2018

In 2018, Target expects to benefit from the recent Shipt acquisition and the Drive Up service. The retailer plans to leverage its network of stores, Shipt’s technology platform and community of shoppers to quickly add same-day delivery to its capabilities in the early part of this year. In addition, the company is looking to open 30 small-format stores and re-model close to 325 stores this year. Target also expects its 2018 GAAP EPS from continuing operations and Adjusted EPS to range between $5.15 to $5.45.

Our $59 price estimate for Target’s stock is slightly below the current market price.