Earnings Preview: Target (TGT) looks set to deliver another strong quarter

Target Corporation (NYSE: TGT) has just come out of a challenging phase marked by inventory issues and margin pressure, mainly due to weak consumer spending. While shoppers remain cautious in their purchases, especially of discretionary items, Target’s margins are improving amid softening inflation. The market will be closely following the company’s upcoming earnings report as it is expected to reflect the current industry trend.

After ending a long-drawn losing streak, the Minneapolis-based department store chain’s stock shifted to recovery mode a few months ago. While TGT has made steady gains since then, it seems there is more room for the stock to grow. With its reasonable valuation, the stock can be a good investment option. A key factor that makes Target attractive to long-term investors is regular dividend hikes, with the current yield exceeding the S&P 500 average.

Estimates

On average, market watchers predict earnings of $2.41 per share for the January quarter, which is sharply higher than the $1.89 per share the company earned in the year-ago quarter. It is also above the mid-point of the management’s earnings per share guidance of $1.90-2.60 for Q4. The report is expected to be out on Tuesday, March 5, at 6:30 a.m. ET. Analysts’ consensus forecast is for a 1.4% increase in fourth-quarter revenues to $31.83 billion.

The company’s cost-control and inventory management efforts are translating into margin growth, lately. While most retailers, including Target, resort to locking up select items in their stores to deal with retail theft, the company’s recent performance shows sales were not affected by that strategy. Meanwhile, the continuing weakness in comparable digital sales – the fourth YoY decline in a row – remains a concern considering the company’s aggressive e-commerce push.

From Target’s Q3 2023 earnings call:

“As we assess the external environment, it’s clear that consumers have been remarkably resilient. Yet at the same time, our research indicates that themes like uncertainty, caution, managing my time and budget, and focusing on essentials while still finding ways to celebrate are all top of mind. Overall, consumers are still spending, but pressures like higher interest rates, the resumption of student loan repayments, increased credit card debt, and reduced savings rates have left them with less discretionary income, forcing them to make trade-offs in their family budgets.”

Q3 Results Beat

In the third quarter, earnings beat estimates for the fourth time in a row, after three consecutive misses. Q3 revenues declined 4% year-over-year to $25.4 billion but topped expectations. Comparable sales dropped 4.9% annually. At $2.10 per share, third-quarter adjusted earnings were up 36% from the year-ago quarter. Unadjusted profit also increased 36% annually to $971 million.

Target’s stock price has increased 6% so far this year, but it remains far below the 2021 peak. On Wednesday, the shares traded slightly above $150.