Target (TGT) 1st Quarter Earnings: What to Expect

Big box retail is not dead, as evidenced by the strong earnings results and forecasts just delivered from Walmart (WMT). Walmart demonstrated with its impressive bottom line beat and its full-year same-store sales forecast in the U.S., not all retail is suffering at the hands of Amazon (AMZN).

All of this bodes well for Target (TGT), which is set to report first quarter fiscal 2019 earnings results before the opening bell Wednesday. Target, which has seen its share price rise just 7% this year, lagging the S&P 500’s 14% climb, will attempt to keep up the pace. Given Target’s meager stock performance, the company will need strong top- and bottom-line results and solid digital growth to excite investors.

Target’s digital revenue, which have grown 25% in the past five consecutive years, surged 36% in 2018. The gains have been driven by its e-commerce investments, including acquisition of grocery delivery startup Shipt. What’s more, the company should benefit from multiple secular trends, including the fact that unemployment is at its lowest in almost five decades, while employee wages are improving. Nevertheless, on Wednesday analysts will want to see improved gross margins from Target to gauge the underlying strength of the business, along with its online sales trends.

For the three months that ended March, Wall Street expects the Minnesota-based retailer to earn $1.43 per share on revenue of $17.5 billion. This compares to the year-ago quarter when earnings came to $1.32 per share on revenue of $16.78 billion. For the full year, ending in December, earnings are projected to rise 8% to $5.83 per share, while revenue of $77.95 billion will rise 3.4% year over year.

The company has pushed deeper not only into e-commerce, but also logistics and delivery. The management sees initiatives such as delivery, in-store pick-up and low shipping fees as means to retain and attract more customers. So far these bets have paid off. In the fourth quarter, comparable sales increased 5.3% to beat the consensus estimated of +5.0%. Meanwhile, store-based comparable sales rose 2.9%, while comparable digital sales grew 31%.

While this was one the company’s strongest quarters in more than two years, it wasn't all good news. During the quarter, Target’s gross profit margin contracted 40 basis points to 25.7%, which reflected higher digital fulfillment and supply-chain costs. To what extent can these trends continue on Wednesday? Beyond the top and bottom-line numbers, Wall Street will also look to see if Target can provide strong guidance.

From a valuation perspective, Target stock still looks attractive, trading at just 16 times fiscal 2019 estimates, which represents a discount compared to the S&P 500 index. In other words, investor patience is still a good strategy, despite the year-to-date underperformance in the stock.

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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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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