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Target (TGT) Up 5.9% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Target Corporation (TGT - Free Report) . Shares have added about 5.9% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is TGT due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Target Misses Q1 Earnings Estimates, Beats Sales

Target Corporation posted second straight quarter of negative earnings surprise, when it reported first-quarter fiscal 2018 results. The company posted adjusted earnings of $1.32 per share that not only missed the Zacks Consensus Estimate of $1.38 but also came below the mid-point of the earlier provided guidance range of $1.25-$1.45 per share.

However, we can’t ignore the fact that the bottom line improved 9.4% from the prior-year period. This year-over-year growth can be attributable to increased sales and fall in interest expense as well as share repurchase activity that to an extent offset rise in cost of sales and higher SG&A expenses.

The company generated total revenue of $16,781 million that came ahead the Zacks Consensus Estimate of $16,529 million for the fifth straight quarter and increased 3.4% from the year-ago quarter. Sales rose 3.5% to $16,556 million, while other revenue declined 1.2% to $225 million.

Target is trying all means to rapidly adapt to the changes in the retail ecosystem. The company is deploying resources to enhance omni-channel capacities, come up with new brands, remodel or refurbish stores, and expand same-day delivery options to expedite the shopping process.

During the quarter under review, Target concluded 56 remodels, opened 7 new outlets and launched three new brands — Universal Thread in women's denim, apparel and accessories; Umbro in Kids and sporting goods; and Opal House in home, and a successful limited-time partnership with Hunter. The company also introduced Drive-Up service in more than 250 stores and expanded Target Restock nationwide. Courtesy to Shipt, the company also rolled out same-day delivery from more than 700 outlets. The company expect to add Drive-Up service in another 300 stores during the second quarter.

Notably, comparable sales for the quarter increased 3% compared with 1.3% decline witnessed in the year-ago period driven by strength seen in home, household essentials and food & beverage. The number of transactions jumped 3.7%, while the average transaction amount decreased 0.6%. Comparable digital channel sales surged 28% and added 1.1 percentage points to comparable sales.

Gross margin contracted 20 basis points to 29.8%, while operating margin shriveled 90 basis points to 6.2%. Industry experts believe that incremental investments and rise in costs due to new fulfillment options might have hurt margins.

Target’s debit card penetration contracted 10 basis points to 13.5%, while credit card penetration fell 50 basis points to 10.6%. Total REDcard penetration declined to 24.1% from 24.7% in the year-ago quarter.

Other Financial Details

During the quarter, Target repurchased shares worth $494 million and paid dividends of $334 million. The company still had about $2.8 billion remaining under its $5 billion share buyback program. The company ended the quarter with cash and cash equivalents of $1,060 million, long-term debt and other borrowings of $11,107 million and shareholders’ investment of $11,158 million.

A Glance at the Outlook

Management now anticipates second quarter comparable sales to be up in the low to mid single-digit range, while for fiscal 2018 the metric is expected to increase in the low-single digit. Target now envisions second quarter earnings in the band of $1.30-$1.50 and fiscal 2018 earnings between $5.15 and $5.45 per share.

Management expects operating margin to contract roughly 40 basis points in the second quarter. The company anticipates interest expense to be $15 million lower in the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter

Target Corporation Price and Consensus

 

Target Corporation Price and Consensus | Target Corporation Quote

VGM Scores

At this time, TGT has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was also allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, TGT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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