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Key Takeaways From Target's Q3 Earnings

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Target ( TGT ) announced better than expected third quarter results, as both its revenues EPS came in ahead of expectations. The stock increased 7% after the earnings announcement. However, the company's revenue declined 7% year-over-year (y-o-y) to $16.4 billion, primarily driven by the sale of its pharmacy business to CVS, investments in promotions and increased digital shipping expenses. The retailer's gross margin was 30.2% comparedto 29.4% in Q3 2015. Target also posted adjusted earnings of $1.04 per share, which was above the high end of the company's guidance. This was largely due to strong performance of Target's signature categories and solid trends in back-to-school and back-to-college season.

On the cost side, earnings before interest and tax (EBIT) margins were 90 basis points higher than the year ago period at 6.4% of sales, driven entirely by a lower selling and general administrative (SG&A) expense rate. The company's performance in its signature categories grew almost 3% y-o-y in the home and apparel division. However, the company continued to witness soft trends in mobile phones, despite improved trends from Apple this quarter.


Comparable Sales Continue To Fall

Target reported a 0.2% y-o-y decline in its comparable sales in Q3, which was within the company's guidance. Among the components of comparable sales, the number of transactions fell by 1.2% y-o-y while the average transaction amount grew 1% y-o-y, in line with its 2016 performance so far. The company's signature categories saw positive comparable sales as compared to other segments. In addition, Target's digital sales grew more than 26% y-o-y contributing about 70 basis points through its comparable sales.


Future Outlook

Target expects its fourth quarter comparable sales to range between -1% and 1%. It also expects a 3% y-o-y decline in company's revenue in the fourth quarter, reflecting the removal of pharmacy and clinic sales from 2016 results. In terms of operating margin, Target expects its EBIT margin rate to be up by about 10 basis points from last year. Altogether, in the fourth quarter, the company expects to generate both GAAP earnings per share ( EPS ) from continuing operations and adjusted EPS in the range of $1.55 to $1.75.

For full year 2016, Target expects approximately flat comparable sales. However, it raised its full-year 2016 earnings guidance to $5.10 to $5.30, compared to prior guidance of $4.80 to $5.20.


Since the fourth quarter marks the holiday season for the retailer, it has already strated gearing up for the most profitable month of the year. The primary segments that have historically peformed well in the holiday season are apparel, entertainment and toys. Target has nearly added 1,800 new and exclusive toys, up more than 15% from last year for the holiday season. In electronics, the company is expecting strong demand for Apple's new products, given that pre-order volume was three times higher than last year. It is also expecting a lot of customer interest in virtual reality, along with connected home devices like Google Home. In its physical stores, Target plans to hire an additional 70,000 temporary workers for the holiday season.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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