What To Expect From Target’s Q2 Earnings

Target (NYSE: TGT) is scheduled to announce its fiscal second quarter results on Wednesday, August 22. The retailer continued to perform well in its fiscal first quarter, as both its revenue and earnings per share (EPS) came in ahead of market expectations. Target has been 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. Target’s revenue increased 3% year-over-year (y-o-y) to $16.8 billion, primarily due to a 3.0% increase in comparable sales in the first quarter. The company’s digital comparable sales grew 1.1% y-o-y, while store comparable sales grew a robust 1.9% y-o-y. The fact that the company has been able to grow its store comparable sales, despite significant competitive pressure, suggests that its initiatives are resonating well with customers. In terms of the bottom line, the company’s GAAP EPS from continuing operations and adjusted EPS grew 9% y-o-y in Q1.

Our $69 price estimate for Target’s stock is around 15% below the current market price. We have created an interactive dashboard on what to expect from Target’s fiscal Q2 and fiscal 2018, which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Overview Of Performance

Target saw its stock decline nearly 10% in 2017, but the company’s stock price has increased more than 20% over the course of 2018. The results of Target’s business transformation have started to show in the company’s financials from Q1. However, the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, is leading to shrinking margins. In Q1, Target’s gross margin was 29.8%, down 20 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling, general and administrative (SG&A) expenses grew 6% y-o-y, due to an increase in compensation expenses, reflecting investments in store hours, wage rates and team member incentives. Going forward, we expect this margin pressure to continue in Q2 as well.

We also expect the company to continue to post an increase in its revenue growth rate in Q2. Target expects its comparable sales growth to accelerate into the low to mid-single-digit range in Q2, primarily due to increased sales in warm weather categories in May and an extra week of the back-to-school season in the quarter compared to last year. The company also expects a decline of about 40 basis points in its operating margin in the quarter. In addition, the retailer expects D&A expenses to come in about $40 million higher than last year, reflecting accelerated depreciation on assets taken out of service due to the remodel program. To add to that, the company expects its second quarter net interest expense to come in about $15 million lower than last year, and also expects an effective tax rate in the range of 22% to 25%. Altogether, the retailer expects GAAP and adjusted EPS of $1.30 to $1.50 in the second quarter.

Fiscal 2018 Outlook

Target plans to leverage its network of stores, and Shipt’s technology platform and community of shoppers, to quickly add same-day delivery to its capabilities. In addition, the company is looking to open 30 small-format stores and remodel close to 325 stores this year. Target is on track to deliver its previous guidance for a low-single-digit increase in comparable sales and GAAP and adjusted EPS of $5.15 to $5.45.

We have forecast Target’s total revenue for fiscal 2018 by estimating the revenues from the company’s domestic sales. Further, we have calculated the retailer’s U.S. revenues by estimating the number of stores, square footage per store and revenue per square foot in fiscal 2018. We expect Target’s 2018 store count in the U.S. to be over 1840, with an average square footage per store of 300k and revenue per square foot of $132, translating into around $73 billion (+2% y-o-y) in domestic revenues in fiscal 2018.