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Target Corporation ( TGT - Analyst Report ) , the operator of general merchandise and food discount stores in the United States, posted its second-quarter 2012 results on August 15. Here we will discuss the company’s scorecard, based on the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.
Last Quarter Synopsis
Minneapolis, Minnesota-based company, Target, posted better-than-expected second quarter results on the backs of healthy sales. Lower shares outstanding also provided cushion to the bottom line.
The company delivered quarterly earnings of $1.06 per share that rose 3.4% from $1.03 earned in the prior-year quarter, and also came ahead of the Zacks Consensus Estimate of $1.01. However, excluding costs related to Canadian operations, earnings from its U.S. operations came in at $1.12 per share, up 4.6% from $1.07 posted in the year-ago quarter. The quarterly earnings fit in with the company’s previous projection of $1.04 to $1.14 per share.
Total revenue climbed 3.3% to $16,779 million from the prior-year quarter, and beat the Zacks
Consensus Estimate of $16,769 million. Retail sales grew 3.5% to $16,451 million as shoppers are gradually opening up their wallets but still remain wary. The company indicated that revenue from the Credit Card segment tumbled 5.1% to $328 million.
Target said that comparable-store sales for the quarter rose 3.1% compared with a 3.9% increase registered in the prior-year quarter.
Target now projects adjusted third-quarter 2012 earnings between 83 cents and 93 cents a share. For fiscal 2012, earnings are expected to be in the range of $4.65 to $4.85 per share, up from $4.60 to $4.80 forecasted earlier.
On a GAAP basis, including expenses related to the company’s entry in the Canadian market, management projected earnings between 69 cents and 79 cents for the third quarter and between $4.20 and $4.40 per share for fiscal 2012, up from $4.10 and $4.30 projected previously.
(Read our full coverage on this earnings report: Target Beats, Ups Outlook)
Agreement of Estimate Revisions
The agreement of estimate revisions indicates that majority of the analysts were unidirectional, following Target’s first-quarter 2012 results.
In the last 7 days, 8 out of 20 analysts covering the stock raised their estimates, whereas 4 analysts lowered the same for the third quarter of 2012. For the fourth quarter, 8 analysts made upward revisions, whereas 5 analysts trimmed their estimates.
For fiscal 2012, 19 analysts revised their estimates upward, and none lowered the same in the last 7 days. For fiscal 2013, 13 analysts increased their estimates and only 3 analysts made downward revisions.
What Drives Estimate Revision
Clearly, a positive sentiment is palpable among most analysts, who remain optimistic on Target’s performance. Following the earnings release, the Zacks Consensus Estimate has been portraying an upward trend with majority of the analysts remaining bullish on the stock.
The better-than-expected results and upbeat earnings guidance impressed the analysts, who went on to revise their estimates to better align it with management’s guidance range. Going forward, analysts remain confident about the company’s initiatives, such as P-fresh remodel program, 5% REDcard Rewards program and Pharmacy Rewards program, The Shops at Target, “Expect More. Pay Less.” brand promise, and City Target stores. Moreover, in order to expand its global footprint, the company is eyeing the Canadian market with an expected entry in 2013.
However, some of the analysts remained on the back foot as they are concerned about the sluggish economic recovery and erratic consumer behavior.
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.
The Zacks Consensus Estimate for the third quarter of 2012 has moved up by a penny to 77 cents a share in the last 7 days. The Zacks Consensus Estimate for the fourth quarter has remained constant at $1.50, as the revisions made by the analysts had a neutral impact on the Zacks Consensus.
For fiscal 2012, the Zacks Consensus Estimate jumped 7 cents to $4.36 in the last 7 days. For fiscal 2013, the Zacks Consensus Estimate rose 3 cents to $4.88.
Target is persistently striving to keep itself afloat in an economy, which is still not completely awakened from the state of hibernation. The company’s P-fresh remodel program, 5% REDcard Rewards program, City Target stores, The Shops at Target initiatives and its foray into the foreign market are its measures of safeguarding itself from any unprecedented events.
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 increased focus on consumable items should boost sales and earnings in a sluggish consumer environment. The company’s long-term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017.
The economy has not yet recovered fully. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.
Moreover, a greater concentration of the company’s revenue generating capabilities in limited regions of the United States, poses a competitive threat to Target, compared with Wal-Mart Stores Inc. ( WMT - Analyst Report ) and Costco Wholesale Corporation ( COST - Analyst Report ) , which are geographically diverse and more resourceful.
Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Target retains a Zacks #2 Rank that translates into a short-term “Buy” rating, and well defines the company’s recent better-than-expected second quarter results and an upbeat guidance.
About Earnings Estimate Scorecard
As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education
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