Can Target Continue Its Growth Momentum After Strong Q4?

Target‘s (NYSE: TGT) fiscal fourth quarter earnings per share and revenues beat market expectations this week. In Q4, Target’s revenue came in flat at $23 billion, but the company saw a strong 5.3% increase in comparable sales. Among the components of the reported comparable sales, traffic grew a strong 4.5% year-over-year (y-o-y) and the average transaction amount increased 0.8% y-o-y. In addition, the company’s digital comparable sales grew 2.4% y-o-y, while store comparable sales grew a robust 2.9% 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 adjusted EPS grew more than 10% y-o-y during this period. The company 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.

Our $83 price estimate for Target’s stock is almost 10% ahead of the current market price. We have created an interactive dashboard – How Did Target Financial Fare in 2018? – which outlines our 2019 forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation and see all Trefis Consumer Discretionary company data here.

Q1 Expectations

The results of Target’s business transformation have started to show in the company’s financials from Q1 2018 on. However, the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, is leading to shrinking margins. In fiscal 2018, Target’s gross margin was down 40 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 4% 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 2019 as well. We expect Target to continue to post an increase in its revenue growth rate in Q1. In terms of comparable sales, the retailer expects first quarter growth in the low- to mid-single digits. In addition, Target guided for Adjusted EPS of $1.32 to $1.52 in Q1, compared to a consensus estimate of $1.43. Target also expects to see a low single-digit increase in operating income.

Fiscal 2019 Outlook

Target plans to leverage its network of stores, and Shipt’s technology platform and community of shoppers, to add same-day delivery to its capabilities. In addition, the company is looking remodel close to 300 stores this year. For the full year, Target is guiding for comp sales growth in the low- to mid-single digits, reflecting the combination of increased traffic to its physical stores, strong market share gains in digital, and greater adoption of its fulfillment capabilities. Further, the company expects Adjusted EPS of $5.75 to $6.05 for the full year, compared to a $5.61 consensus mark.

Target is focused on controlling costs to offset the increased investments in the growing digital business. With that discipline in 2019, the company plans to improve its operating margin in mid-single digits.

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