Can Target Stock Trade Higher Post Q1 Earnings?

Target (NYSE: TGT), the second-largest discount chain in the U.S., is scheduled to report its fiscal first-quarter results on Wednesday, May 19. We expect Target to likely beat 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 showed 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 212% year-over-year increase in same-day service revenues in Q4. It should be noted that the same-day services were already growing at triple-digit percentage rates even before the pandemic. We expect the company to ride on this growth momentum in Q1 as well.

Target 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. Investors will be looking forward to seeing Target’s detailed outlook for 2021 that can be compared to rivals such as Walmart (NYSE: WMT).

Our forecast indicates that Target’s valuation is around $213 per share, which is 2% higher than the current market price of around $210. Look at our interactive dashboard analysis on Target’s Pre-Earnings: What To Expect in Q1? for more details.

(1) Revenues expected to be ahead of consensus estimates

Trefis estimates Target’s Q1 2021 revenues to be around $22.2 Bil, 2% ahead of the consensus estimate of $21.8 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 20% y-o-y in fiscal 2020. 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%. This trend continued albeit at a slower pace with comps jumping 20.7% (online comps grew 155%) and 20.5% (digital comps rising 118%) in Q3 and Q4, respectively. Around 95% of digital orders were fulfilled in stores in the fourth 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 Q1 2021 earnings per share (EPS) is expected to be $2.30 per Trefis analysis, almost 2% above the consensus estimate of $2.25. While the retailer saw incremental Covid expenses for 2020, due to special bonuses to hourly employees, higher wages in fulfillment centers, and an exponential increase in digital sales – its stronger revenue growth helped to offset those expenses. Consequently, the retailer’s adjusted EPS jumped 47% during this period.

For the full year 2021, we expect Target’s adjusted net margin to decline 20 basis points to 4.8%. This coupled with a marginal fall in Target’s revenues, could lead to a slump of $300 million y-o-y in adjusted net income to $4.4 billion in 2021. All this, resulting in a possible adjusted EPS decline from $9.42 in FY 2020 to around $8.99 in FY 2021.

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

Going by our Target’s Valuation, with an adjusted EPS estimate of around $8.99 and P/E multiple of 23.7x in fiscal 2021, this translates into a price of $213, which is 2% ahead of the current market price of roughly $210.

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