A month has gone by since the last earnings report for Target (TGT). Shares have lost about 3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Target due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Target’s Q2 Earnings Surpass Estimates, Comps Rise
Target Corporation registered a stellar performance in second-quarter fiscal 2020, wherein both the top and the bottom lines not only beat the Zacks Consensus Estimate but also grew year over year. While the quarter marked the sixth successive earnings beat, revenues surpassed the estimate for the second straight time. Notably, comparable sales increased for the 13th consecutive quarter. The metric gained from strength in the digital channel, given customers’ increased shift to online shopping amid coronavirus-led social distancing.
This operator of general merchandise stores reported adjusted earnings of $3.38 per share that surpassed the Zacks Consensus Estimate of $1.64, and rose sharply from $1.82 per share reported in the year-ago period. Impressively, solid operating performance helped offset unprecedented investments in team member pay & benefits amid the coronavirus crisis.
The company generated total revenues of $22,975 million that increased 24.7% from the year-ago period and outpaced the Zacks Consensus Estimate of $20,235.1 million. We note that sales jumped 24.8% to $22,696 million, while other revenues were up 16.6% to $279 million.
Let’s Delve Deeper
Markedly, Target witnessed sturdy market-share gains in all five core merchandise categories owing to strong demand. Consumers splurged on office items, video games, décor, domestics and kitchenware as they work, learn, dine and play at home. While electronics sales soared more than 70%, apparel sales rebounded from a 20% decline in the first quarter to double-digit growth in the second quarter. Home and beauty rose by more than 30% and 20%, respectively. Notably, both essentials and food & beverage were up by about 20%.
We note that stores fulfilled more than 90% of the company’s sales in the quarter. Same-day services (Order Pick Up, Drive Up and Shipt) surged 273% and accounted for roughly 6 percentage points of total comparable sales growth. Sales fulfilled by Shipt were up more than 350% year over year and sales through Drive-Up were up more than 700% during the quarter under review. In-store pick-up sales rose more than 60%.
Meanwhile, comparable sales for the quarter increased 24.3%, backed by a 18.8% jump in average basket as consumers consolidated trips amid the pandemic. The number of transactions rose 4.6%. Digital comparable sales soared 195% and added 13.4 percentage points to comparable sales. Store originated comparable stores sales grew 10.9% during the quarter.
Gross margin expanded 30 basis points to 30.9% during the quarter on account of higher sales and lower discounts driven by high sell through rates. Operating margin grew 280 basis points to 10% primarily due to strong expense leverage on solid sales performance.
Target’s debit card penetration shrunk 70 basis points to 11.8%, while credit card penetration fell 200 basis points to 8.7%. Total REDcard penetration declined to 20.5% from the year-ago quarter’s 23.2%.
Other Financial Details
During the reported quarter, Target paid dividends of $330 million. On Mar 25, the company informed that it has suspended its share-buyback plan as part of the company’s efforts to preserve financial flexibility amid the crisis. The company had $4.5 billion remaining under its $5-billion share-buyback program approved last September.
Target incurred capital expenditures of about $660 million during the quarter under review. Management now expects to incur capital expenditures between $2.5 billion and $3 billion in fiscal 2020, in contrast to prior expectation of about $3.5 billion.
The company ended the quarter with cash and cash equivalents of $7,284 million, long-term debt and other borrowings of $14,188 million and shareholders’ investment of $12,578 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 18.33% due to these changes.
Currently, Target has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Target has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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