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Target (TGT) Q3 Earnings: Omnichannel Strategy to Fuel Growth

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Target Corporation (TGT - Free Report) is scheduled to release third-quarter fiscal 2018 results on Nov 20. Well the obvious question that comes to mind is whether this operator of general merchandise stores will be able to deliver positive earnings surprise in the quarter to be reported. The company delivered a positive earnings surprise of 5% in the preceding quarter.

After registering bottom-line increase of 19.8% in the secod quarter, Target is likely to record year-over-year growth in the third quarter as well. The Zacks Consensus Estimate for the quarter under review is pegged at $1.10, reflecting year-over-year growth of roughly 21% from the year-ago quarter. We note that the Zacks Consensus Estimate has remained stable in the last 30 days.

Analysts polled by Zacks now project revenues of $17,791 million, up about 7% year over year. If all goes well, this will be the seventh straight quarter of top-line beat.

Target Corporation Price, Consensus and EPS Surprise

 

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

Factors Shaping the Outcome

Target has chalked out strategies to adapt to the fast-changing retail landscape. The company is deploying resources to enhance omni-channel capacities, coming up with new brands, remodeling or refurbishing stores, and expanding same-day delivery options. Target has undertaken rationalization of supply chain with same-day delivery of in-store purchases, and technology and process improvements.

Same-Day Delivery to Lift Sales

Retailers are ensuring speedy delivery to customers. In fact, retailers are either acquiring or partnering with delivery service companies for same-day delivery to stay ahead in the race. With the aim of capitalizing on the booming online grocery delivery market, Target teamed up with popular online grocery delivery service Instacart. The company also made significant headway in the same-day delivery race by acquiring Internet-based grocery delivery service Shipt to provide same-day delivery of groceries, essentials, home, electronics as well as other products.

Restock Program & Other Initiatives

The company has rolled out Target Restock program that enables customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge. Drive Up, an app-based service, is another initiative to expedite the shopping process. The service allows customers to place orders using the Target app and have it delivered to their cars.

All these efforts are likely to impact the quarterly results favorably. Management had earlier guided third-quarter fiscal 2018 earnings in the band of $1.00-$1.20.

Will Margins Remain Under Pressure?

Margin, an important financial metric that gives an indication about the company’s health, has been declining. We note that the operating margin shriveled 90 basis points (bps) and 20 bps to 6.2% and 6.4% during the first and second quarter of fiscal 2018, respectively. Management had earlier hinted that operating margin is likely to decrease roughly 20-30 basis points in the third quarter due to contraction of 30-40 bps in gross margin and expectation of marginal increase in SG&A expense rate. Management hinted that higher sales expectations of lower margin categories such as Toys and Baby may impact gross margin. Analysts pointed that any increase in depreciation and amortization on account of remodel program, rise in costs due to new fulfillment options, higher wages and incremental investments may also weigh on margin.

What Does the Zacks Model Suggest?

Our proven model shows that Target is likely to beat estimates this quarter. A stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Target has a Zacks Rank #2 and an Earnings ESP of +1.41%. This makes us reasonably confident of an earnings beat.

Other Stocks Poised to Beat Earnings Estimates

Here are some other companies you may want to consider as our model shows that these too have the right combination of elements to post earnings beat.

Burlington Stores (BURL - Free Report) has an Earnings ESP of +2.38% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Eagle (AEO - Free Report) has an Earnings ESP of +2.95% and a Zacks Rank #2.

Costco (COST - Free Report) has an Earnings ESP of +3.09% and a Zacks Rank #3.

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