Target Stock Gains To Continue Post Q3 Results?

Target (NYSE: TGT) is scheduled to report its fiscal third-quarter results on Wednesday, November 18. We expect Target to likely beat the revenue and earnings expectations, driven by a boost in products related to in-home activities, such as home office and entertainment needs. In 2020, Target has shown that its brick-and-mortar stores have a place in the future of retail, and it’s leveraging that position to add more convenient online alternatives. The retailer invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt, all this while leveraging its brick-and-mortar stores – resulting in a stellar 273% growth in same-day services in Q2. That said, the news of Pfizer’s vaccine showing positive results should not impact Target’s near term outlook, as it is able to strike a balance between physical and digital sales. We expect the company to ride on this growth momentum in Q3 as well.

Our forecast indicates that Target’s valuation is around $169 a share, which is marginally higher than the current market price of over $166. Look at our interactive dashboard analysis on Target’s Pre-Earnings: What To Expect in Q3? for more details.

(1) Revenues expected to be ahead of consensus estimates

Trefis estimates Target’s Q3 2020 revenues to be around $21.4 Bil, 2% ahead of the consensus estimate of $20.93 Bil. The Covid-19 crisis boosted sales of essential products at both Target’s online and brick-and-mortar stores. Consequently, the retailer’s revenue grew 18% year-over-year (y-o-y) in the first two quarters of this year. In Q1, its total comparable sales jumped 10.8% and its digital comps grew 141%. For Q2, its total comps rose 24.3% as its digital comps surged 195%. Around 90% of digital orders were fulfilled in stores in the second quarter, providing a cost-effective approach to e-commerce that allows the company to make a profit from strong ordering.

2) EPS also likely to be ahead of consensus estimates

Target’s Q3 2020 earnings per share (EPS) is expected to be $1.81 per Trefis analysis, almost 13% above the consensus estimate of $1.60. While the retailer saw incremental Covid expenses so far this year, due to special bonuses to hourly employees, higher wages in fulfillment centers, and an exponential increase in digital sales during the quarter, its stronger revenue growth helped to offset those expenses. Consequently, the retailer’s diluted EPS jumped 17% during the same period.

For the full-year, we expect Target’s adjusted net margin to remain nearly flat at 4.2% in fiscal 2020. This coupled with a 15% y-o-y growth in Target’s revenues, could lead to a rise of $500 million y-o-y in adjusted net income to $3.8 billion in 2020. All this, resulting in a possible adjusted EPS increase from $6.36 in FY 2019 to around $7.33 in FY 2020.

(3) Stock price estimate slightly higher than the current market price

Going by our Target’s Valuation, with an EPS estimate of around $7.33 and P/E multiple of 23x in fiscal 2020, this translates into a price of $169, which is marginally ahead of the current market price of over $165.

Target has been able to adapt to a new normal and could thrive going forward – given that people are getting back to work and the economy is starting to pick up again. The retailer is stepping up its offering by making fresh and frozen groceries available through Order Pickup and Drive Up. In addition, as shoppers return to their usual buying habits, there could be a surge in Target’s sales in apparel and other higher-margin discretionary categories, as well. Target’s discounted prices and private-label brands (that differentiate it from Amazon) are a big draw for customers.

Note: P/E Multiples are based on Share Price at the end of the year, and reported (or expected) Adjusted Earnings for the full year

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