Earnings Preview: Target

Target Corporation (TGT - Analyst Report), the operator of general merchandise and food discount stores in the United States and an S&P 500 company, is slated to report its fourth quarter and fiscal 2011 financial results before the opening bell on Thursday, February 23, 2012.

The current Zacks Consensus Estimate for the quarter is pegged at $1.39 per share that reflects a decline of 4.1% from the prior-year quarter’s earnings. The analysts’ estimates in the current Zacks Consensus range between a low of $1.32 and a high of $1.43 per share. The Zacks Consensus estimates revenue at $21,244 million for the fourth quarter.

The current Zacks Consensus Estimate for fiscal 2011 is $4.24 per share. Further, analysts polled by Zacks expect full year revenue to be $69,790 million.

Recap of Third-Quarter 2011

Target posted better-than-expected third-quarter 2011 results on the back of higher sales and improved profitability across credit card business. The quarterly earnings of 87 cents a share topped the Zacks Consensus Estimate of 74 cents and surged 28% from 68 cents earned in the prior-year quarter.

Total revenue for the quarter climbed 5.1% to $16,402 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $16,330 million. Retail sales grew 5.4% to $16,054 million as shoppers are gradually opening up their wallets, though cautiously.

Minneapolis, Minnesota based company, Target, said that comparable-store sales for the quarter grew 4.3% compared with 1.6% increase registered in the prior-year quarter. The number of transactions rose marginally by 0.3%, whereas the average transaction amount climbed 4.1% in the quarter.

Management Guided

In January 2012, Target lowered its fourth-quarter 2011 earnings guidance, following disappointing December sales results. The company now expects earnings of $1.35 to $1.43 per share, compared with its earlier guidance of $1.43 to $1.53.

Zacks Agreement & Magnitude

The agreement of estimate revisions indicates that the majority of the analysts are unidirectional about Target’s performance in the fourth quarter. In addition, the magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.

Of the 20 analysts following the stock, 5 analysts revised their estimate upwards, whereas only 1 analyst lowered the same in the last 30 days for the fourth quarter of 2011, which led to Zacks Consensus Estimate improving by a penny to $1.39.

For fiscal 2011, 5 analysts moved up their estimates, and 1 analyst revised the estimate downwards, resulting in the Zacks Consensus Estimate moving up by a couple of cents to $4.24.

None of the analysts have made either upward or downward revisions in their estimates in the last 7 days.

What Drives Estimate Revisions

The upward movement in the Zacks Consensus Estimate follows the better-than-expected sales results for the four-week period ended January 28, 2012. Target registered an increase of 4.3% in comparable-store sales for January 2012 compared with a rise of 1.7% in the prior-year period.

January sales were near the high end of the company’s expected growth range of low-to-mid single digit, reflecting increase in average transaction size coupled with a rise in comparable store transactions. The results were driven by strong performance of shoes, health care products and apparels.Net retail sales for January increased 5.1% to $4,608 million from $4,383 million reported in the prior-year period.

All these were enough to bolster the analysts’ confidence in the stock, who went on to revise their estimates upwards.

Positive Earnings Surprise History

With respect to earnings surprises, Target topped the Zacks Consensus Estimate over the last four quarters in the range of 3.6% to 10.8%. The average remained at 6.5%. This suggests that Target has beaten the Zacks Consensus Estimate by an average of 6.5% in the trailing four quarters.

Price Stats

Since its last earnings release on November 16, 2011, Target’s market price has dropped marginally by 0.2% to $52.54 as of February 21, 2012. During trading hours on February 21, the stock reached an intra-day low of $52.31 and an intra-day high of $53.19. The stock price is within the range of the 52-week low-high range of $45.28 attained on August 8, 2011 and $56.00 achieved on October 27, 2011. From November 16, 2011, to February 21, 2012, the stock dropped to a low of $47.25 on January 5, 2012, and rose to a high of $54.99 on November 16, 2011.

Let’s Conclude

Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that focus on consumable items should boost sales and earnings in a sluggish consumer environment.

Target now tends to focus more on store renovations and store sales productivity, smaller format stores, and opportunities to open stores in international markets.

The greater concentration of Target’s revenue generating capability in a few regions of the United States, poses a threat, compared to the geographically diversified and more resourceful Wal-Mart Stores Inc. (WMT - Analyst Report) and Costco Wholesale Corporation (COST - Analyst Report).

Consequently, we prefer to have a long-term ‘Neutral’ rating on the stock. Moreover, Target holds a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation.

Read the full analyst report on WMT

Read the full analyst report on TGT

Read the full analyst report on COST