Why Is Target (TGT) Down 11.6% Since Last Earnings Report?

It has been about a month since the last earnings report for Target (TGT). Shares have lost about 11.6% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Target Q4 Earnings Surpass Estimates, Increase Y/Y

Target Corporation came up with fourth-quarter fiscal 2019 results, which display the fourth straight quarter of an earnings beat. However, total revenues fell shy of the Zacks Consensus Estimate. On a brighter note, both the top and the bottom line continued to increase year over year. Again, management highlighted that this was the 11th successive quarter of comparable sales growth buoyed by decent performance in both stores and digital channels.

However, we note that the rate of comparable sales growth decelerated on a sequential basis. This may be due to disappointing holiday season with sales coming in below expectations. Softer-than-expected performance across Electronics, Toys and portions of Home assortment hurt the overall holiday sales. Nonetheless, Target continued to gain market share across core merchandise categories, namely Apparel, Essentials & Beauty and Food & Beverage.

Let’s Delve Deeper

This operator of general merchandise stores reported adjusted earnings of $1.69 per share that surpassed the Zacks Consensus Estimate of $1.66 and improved 10.6% from the prior-year period. This year-over-year growth can be attributable to higher sales and share repurchase activity.

Target envisions first-quarter fiscal 2020 adjusted earnings between $1.55 and $1.75 per share, the mid-point of which — $1.65 — is higher than $1.53 reported in the year-ago period. For fiscal 2020, management anticipates adjusted earnings in the band of $6.70-$7.00, the mid-point of which — $6.85 — is higher than earnings of $6.39 posted in fiscal 2019.

The company generated total revenues of $23,398 million that increased 1.8% from the year-ago period but fell short of the Zacks Consensus Estimate of $23,472 million, after surpassing the same in the preceding three quarters. We note that sales jumped 1.8% to $23,133 million, while other revenue rose 9.3% to $265 million.

Target is deploying resources to enhance omni-channel capacities, coming up with new brands, remodeling or refurbishing stores, and expanding same-day delivery options. Target has undertaken rationalization of supply chain with same-day delivery of in-store purchases along with technology and process improvements.

Meanwhile, comparable sales for the quarter increased 1.5% compared with 4.5% increase registered in the preceding quarter and 5.3% growth witnessed in the year-ago period. The number of transactions rose 1.3%, while the average transaction amount improved 0.2%. Management envisions low-single digit increase in comparable sales during the first quarter as well as fiscal 2020.

Comparable digital channel sales surged 20% and added 2.2 percentage points to comparable sales. Clearly, the figure does not look as outstanding when compared with 31% increase reported in the third quarter of fiscal 2019.

Gross margin expanded 60 basis points to 26.3% during the quarter on account of cost optimization, pricing, promotions and assortment, and favorable category sales mix. Management expects gross margin rate to improve moderately in the first quarter and remained flat in fiscal 2020.

Operating income increased 7.3% to $1,198 million, whereas operating margin expanded 20 basis points to 5.1%. Target expects mid-single digit increase in operating income in both the first quarter and fiscal 2020.

Target’s debit card penetration shrunk 20 basis points to 12.4%, while credit card penetration fell 10 basis points to 10.9%. Total REDcard penetration declined to 23.3% from 23.6% in the year-ago quarter.

Other Financial Details

During the quarter, Target repurchased shares worth $606 million and paid dividends of $334 million. The company still had about $0.1 billion remaining under its $5 billion share buyback program approved in 2016. In September 2019, the company’s board authorized a new $5 billion share repurchase program.

The company ended the quarter with cash and cash equivalents of $2,577 million, long-term debt and other borrowings of $11,338 million and shareholders’ investment of $11,833 million. Management incurred capital expenditures of roughly $3 billion during fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.48% due to these changes.

VGM Scores

At this time, Target has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Target has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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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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