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Target (TGT) Q3 Earnings & Sales Beat Estimates; Ups View

ZUMZ TGT TJX BURL

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Target Corporation (TGT - Free Report) continued with its positive earnings streak for the third quarter in a row, as it reported third-quarter fiscal 2016 results. Total sales also came ahead of the Zacks Consensus Estimate, after missing the same in the past four successive quarters. The better-than-expected results prompted management to raise its outlook. These were enough to provide momentum to the stock that jumped roughly 10% during the pre-market trading hours.

The company’s upbeat performance came on the back of improved traffic and sales trends coupled with margin expansion. Management hinted that the company witnessed sturdy sales in the Back-to-School and Back-to-College season. However, what came as a drawback was that the company failed to contain the decline in the top line.

Let’s Unveil the Picture

The company posted adjusted earnings of $1.04 per share that exceeded the Zacks Consensus Estimate of 83 cents as well as management’s previous provided guidance of 75–95 cents per share. Earnings per share surged 22.1% year over year.

Including one-time items, earnings from continuing operations came in at $1.06 per share compared with 76 cents reported in the year-ago period.

The company generated total sales of $16,441 million that surpassed the Zacks Consensus Estimate of $16,318 million. However, we note that total sales decreased 6.7% following declines of 7.2% and 5.4% witnessed in the second and first quarters, respectively. The sale of the pharmacy and clinic businesses to CVS Health impacted the top line.

Nevertheless, Target is deploying resources solely in the domestic markets, after winding up its Canadian operations. The company is focusing on developing its omnichannel capacities. The company also intends to invest in merchandise categories such as Style, Baby, Kids and Wellness.

Minneapolis-based Target’s comparable sales for the quarter decreased 0.2%. The number of transactions declined 1.2%, while the average transaction amount climbed 1%. Comparable digital channel sales surged 26% and added 0.7 percentage points to comparable sales.

Gross profit decreased 3.9% to $4,970 million, however, gross margin expanded 80 basis points to 30.2%. Operating income rose 9.9% to $1,057 million, while operating margin increased 90 basis points to 6.4%.

Target’s credit card penetration expanded 120 basis points to 11.4%, whereas debit card penetration increased by 80 basis points to 12.9% during the quarter. Total REDcard penetration climbed to 24.3% from 22.3% in the year-ago quarter.

Other Financial Details

During the quarter, Target repurchased shares worth $878 million and paid dividends of $345 million. Target's board of directors authorized a new $5 billion share buyback program to be initiated on completion of the current $10 billion program.

The company ended the quarter with cash and cash equivalents (including short-term investments) of $1,231 million, long-term debt and other borrowings of $12,097 million and shareholders’ investment of $11,069 million.

TARGET CORP Price, Consensus and EPS Surprise

TARGET CORP Price, Consensus and EPS Surprise | TARGET CORP Quote

A Glance at the Outlook

Management now expects fourth-quarter comparable sales to be in the range of down 1% to up 1%. Earlier, the company had projected comparable sales to be flat to down 2%. For the final quarter, Target expects adjusted earnings per share to be in the band of $1.55–$1.75.

For fiscal 2016, Target now envisions adjusted earnings per share between $5.10 and $5.30 compared with the previous guidance of $4.80–$5.20.

The current Zacks Consensus Estimate for the fourth quarter and fiscal 2016 stands at $1.62 and $4.96, respectively.

Zacks Rank

Target carries a Zacks Rank #4 (Sell). Better-ranked stocks in the retail sector include Burlington Stores, Inc. (BURL - Free Report) , Zumiez, Inc. (ZUMZ - Free Report) and The TJX Companies, Inc. (TJX - 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.

Burlington Stores delivered an average positive earnings surprise of 16.1% over the trailing four quarters and has a long-term earnings growth rate of 18.4%.

Zumiez delivered an average positive earnings surprise of 32% over the trailing four quarters and has a long-term earnings growth rate of 15%.

TJX Companies delivered an average positive earnings surprise of 5.9% over the trailing four quarters and has a long-term earnings growth rate of 10.7%.

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