Target (TGT - Free Report) shares have soared over 22% since its second-quarter 2019 financial results on August 21 blew away Wall Street. So should investors think about buying Target stock following its stellar earnings release, even though it rests near a new all-time high?
Quick Q2 Overview
Target’s adjusted earnings jumped over 20% from the year-ago period to easily top our Zacks Consensus Estimate. Overall Q2 revenues also beat estimates and popped 3.6% to reach $18.42 billion. Plus, comparable sales climbed 3.4%, driven by 2.4% traffic expansion. Target’s comp sales surged nearly 10% on a two-year stack, which marked its strongest performance in over a decade in this key retail metric.
The Minneapolis-based retailer’s digital channel sales soared 34%, as the firm’s same-day fulfillment services continued to prove attractive to consumers. Target executives then upped their full-year earnings guidance on the back of a strong first half.
TGT’s impressive quarter followed another strong period from rival Walmart (WMT - Free Report) that proved to Wall Street once again that the two brick and mortar firms are ready to thrive in the Amazon (AMZN - Free Report) age. Despite Walmart and Target’s growth, department stores, including Macy’s (M - Free Report) and Nordstrom's (JWN - Free Report) struggles remain (also read: Q2 Earnings Season Scorecard).
Target, like everyone in retail, has rolled out a series of new-age initiatives. Target has roughly 1,800 stores and has improved its digital business, introduced delivery options, and much more over the last few years. This includes Order Pick Up, Drive Up, and Shipt, which made up approximately 1.5% of the TGT’s overall comparable sales growth during the second quarter.
Target has also redesigned stores, opened smaller locations in college towns and urban areas, and rolled out trendy new lines. Target has launched more than 20 private-label brands over the last serval years and also consistently partners with higher-end brands such as Hunter Boot and Vineyard Vines for limited releases.
The company’s ability to roll out these partnerships and offer compelling brands across clothing and home décor help it remain attractive to its core consumer base, of which 57% are college graduates. Target also announced only days before its Q2 earnings results the launch of its Good & Gather brand. Target said in a company release that the “flagship brand will offer a wide range of food and beverage products that prioritize taste, quality ingredients and ease, at a great value.”
Good & Gather, which will be Target's largest owned brand, is set to be available in stores and online on September 15 and will include more than 2,000 products across food and beverage by the end of 2020. It is worth noting that Good & Gather will over time phase out Target's existing brands such as Archer Farms.
Looking ahead, our current Zacks Consensus Estimates call for the company’s third quarter revenue to jump 3.2% to reach $18.39 billion. This would come in just below Q2’s top-line growth, but we should remember that Target topped our Q2 estimate. TGT’s fiscal 2019 revenue is then projected to climb 3.6% to reach $78.07 billion, with 2020 expected to come in 3.1% higher at $80.51 billion.
More specifically, and perhaps more importantly, our Key Company Metric estimates call for Target’s Q3 comparable sales to climb 3.5%, which would top Q2’s growth. And the firm’s full-year fiscal 2019 comps are projected to pop 3.74%.
Target’s adjusted quarterly earnings are expected to climb 7.3% to $1.17 per share, with full-year earnings expected to climb 13.7%. Peeking a bit further down the road, TGT’s fiscal 2020 EPS figure is projected to climb 5.6% higher than our 2019 estimate. Furthermore, Target has seen its longer-term, fiscal 2019 and 2020, earnings estimate revision activity trend heavily upward recently.
Target’s post-Q2 earnings release estimate revision positivity helps TGT earn a Zacks Rank #2 (Buy) at the moment. The company also boasts “A” grades for Value and Growth in our Style Scores system.
For instance, Target is currently trading at 16.4X forward 12-month Zacks Consensus earnings estimates. This vital valuation metric has predictably climbed since Target stock soared last week. Yet, it still marks a discount compared to its industry’s 25.2X average and doesn’t rest too far above its five-year median of 14.2X. Target’s forward price/sales ratio of 0.69 also represents a discount against its industry’s 0.75 average.
Target stock has skyrocketed roughly 60% in 2019 and closed regular trading Monday just off its new highs at $104.77 per share. Therefore, a pullback might be in order, which means many investors likely want to wait.
With that said, Target could be headed for a sustained upward climb based on its growth prospects. And with a 2.55% dividend yield at the moment, TGT stock certainly seems worth considering as bond yields continue to fall.
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