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Target (TGT) Q4 Earnings & Sales Miss Estimates; Stock Down

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After three straight quarters of earnings beat, Target Corporation (TGT - Free Report) succumbed to a negative earnings surprise of 3.3% in the fourth quarter of fiscal 2016. Total sales also came below the Zacks Consensus Estimate, after surpassing the same in the preceding quarter. Moreover, it failed to contain the decline in the top line. The dismal performance compelled management to provide a bleak outlook for fiscal 2017. Consequently, shares are down approximately 13% during pre-market trading hours.

We noted that Target has underperformed the industry in the past one year. In the said time frame, the stock has declined 14.7%, while the Zacks categorized Retail-Discount & Variety industry has increased 7.4%.

Let’s Unveil the Picture

The company posted adjusted earnings of $1.45 per share that missed the Zacks Consensus Estimate of $1.50 and dovetailed with the lower end of management’s earlier guided range of $1.45–$1.55. Earnings per share dropped 4.6% year over year.

Including one-time items, earnings from continuing operations came in at $1.46 per share, down 37% from $2.31 reported in the year-ago period.

The company generated total sales of $20,690 million that fell short of the Zacks Consensus Estimate of $20,746 million. We noted that total sales decreased 4.3%, following declines of 6.7%, 7.2% and 5.4% witnessed in the third, second and first quarters, respectively. The sale of the pharmacy and clinic businesses to CVS Health, stiff competition and sluggish traffic impacted the top line.

Nevertheless, Target is focusing on developing its omnichannel capacities. The company also intends to invest in merchandise categories such as Style, Baby, Kids and Wellness. Management will come out with new financial model for fiscal 2017. The company intends to launch new brands and will try to be more competitive in terms of price. It informed that the new model might weigh on sales and profits in the short run but will help firm its position in the long run.

Minneapolis-based Target’s comparable sales for the quarter decreased 1.5%. The number of transactions inched up 0.2%, while the average transaction amount declined 1.6%. Comparable digital channel sales surged 34% and added 1.8 percentage points to comparable sales.

Gross profit decreased 7.6% to $5,574 million, while gross margin contracted 100 basis points to 26.9%. Operating income fell 13.5% to $1,344 million, while operating margin shriveled 70 basis points to 6.5%.

Target’s credit card penetration expanded 90 basis points to 11.6%, whereas debit card penetration increased by 40 basis points to 12.7% during the quarter. Total REDcard penetration climbed to 24.3% from 23% in the year-ago quarter.

Other Financial Details

During the quarter, Target repurchased shares worth $565 million and paid dividends of $337 million. The company also completed its previously announced $10 billion share buyback program and commenced repurchasing under its current $5 billion share repurchase program. Under the current authorization, Target bought back shares worth $264 million in the quarter under review. The company still has about $4.7 billion remaining under the current program at the end of the quarter.

The company ended the quarter with cash and cash equivalents (including short-term investments) of $2,512 million, long-term debt and other borrowings of $11,031 million and shareholders’ investment of $10,953 million.

Target Corporation Price, Consensus and EPS Surprise

 

Target Corporation Price, Consensus and EPS Surprise | Target Corporation Quote

A Glance at the Outlook

During the first quarter of fiscal 2017, management expects a low-to-mid single digit decline in comparable sales and projects adjusted earnings in the range of 80 cents to $1.00 per share, down from $1.29 recorded in the first quarter of fiscal 2016.

For fiscal 2017, Target forecasts a low-single digit decline in comparable sales and envisions adjusted earnings in the band of $3.80–$4.20 per share, down from $5.01 posted in fiscal 2016.

The current Zacks Consensus Estimate for the first quarter and fiscal 2017 stand at $1.31 and $5.29, respectively, which could witness a downward revision in the coming days.

Zacks Rank

Target carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include The Children's Place, Inc. (PLCE - Free Report) , Zumiez, Inc. (ZUMZ - Free Report) and Ross Stores, Inc. (ROST - Free Report) all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Children's Place delivered an average positive earnings surprise of 36.3% over the trailing four quarters and has a long-term earnings growth rate of 10.3%.

Zumiez delivered an average positive earnings surprise of 30.9% over the trailing four quarters and has a long-term earnings growth rate of 15%.

Ross Stores delivered an average positive earnings surprise of 5% over the trailing four quarters and has a long-term earnings growth rate of 10.5%.

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