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Here's Why Target's (TGT) Q4 Earnings are Likely to Rise Y/Y

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Target Corporation (TGT - Free Report) is scheduled to release fourth-quarter fiscal 2018 results on Mar 5. The company’s bottom-line has underperformed the Zacks Consensus Estimate by average of 0.7% in the trailing four quarters. This operator of general merchandise stores recorded a negative earnings surprise of 1.8%.

After registering bottom-line increase of 20.2% in the third quarter, Target is likely to deliver year-over-year growth in the fourth quarter as well. The Zacks Consensus Estimate for the quarter under review is pegged at $1.53, reflecting year-over-year increase of roughly 11.7% from the year-ago quarter. We note that the Zacks Consensus Estimate has remained stable in the last 30 days.

The Zacks Consensus Estimate for revenues is pegged at $23.15 billion, up about 1.7% year over year. If all goes well, this will be the eighth straight quarter of top-line beat.

Factors Influencing Target’s Performance

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.

Decent Holiday Season

Target’s impressive holiday sales number formed a perfect base for the final quarter. Comparable sales rose 5.7% and showed a sharp improvement from 3.4% growth registered in the year-ago period. The company’s efficient store and digital strategies are clearly yielding results. Target’s 2018 holiday sales were fueled by robust traffic, favorable store comps and a 29% surge in comparable digital sales. Notably, Store Pickup plus Drive Up soared more than 60% year over year, and formed nearly 25% of Target’s digital sales during the reported period.

Following holiday sales results, management continues to anticipate comparable sales growth of approximately 5% in the fourth quarter. Target maintained fiscal 2018 adjusted earnings guidance of $5.30-$5.50 per share.

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 enables 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.

Will Margins Remain Under Pressure?

We note that the gross margin shriveled 20 basis points (bps), 10 bps and 90 bps during the first, second and third quarter of fiscal 2018, respectively. During the third quarter, gross margin contracted due to increased supply chain costs on account of digital fulfillment costs and the expense related to the processing of inventory. A clear reflection of this was visible on the operating margin that also shrunk 40 bps, in spite of SG&A expense rate being flat. Management expects gross margin to remain under pressure, however, the rate of contraction is not likely to be as aggressive as in the third quarter.

What Does the Zacks Model Suggest?

Our proven model does not conclusively show 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 #3 but an Earnings ESP of 0.00%, which makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

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

Kroger (KR - Free Report) has an Earnings ESP of +3.42% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain (OLLI - Free Report) has an Earnings ESP of +1.43% and a Zacks Rank #2.

Costco (COST - Free Report) has an Earnings ESP of +0.62% and a Zacks Rank #3.

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