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Is Target (TGT) Stock a Buy After Strong Q3 Earnings?

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Target (TGT - Free Report) shares soared over 14% Wednesday to hit a new all-time high after the retailer posted a strong third quarter performance. The company was able to follow up its main competitor, Walmart (WMT - Free Report) , with an impressive report that sets the table for the upcoming holiday season. However, with Amazon (AMZN - Free Report) expanding its delivery services to include its Amazon Fresh, does Target still seem like a solid long-term choice?

Can Target Roll with the Punches?

Amazon has been eyeing the supermarket space for quite some time as its purchase of Whole Foods can attest. The e-commerce giant added its Amazon Fresh products to its Prime membership to further its push into the grocery space. Prime members can now order off Amazon Fresh and receive their products in two hours. With the convenience of delivered groceries encouraging consumers to ditch conventional grocery shopping, how can Target respond to keep up its impressive performance?

Target tested a new program called Drive Up in Minneapolis that allows customers to order online and pull into a designated spot in the Target lot where workers load the items into the customer’s car. The feature is convenient for those looking to save time doing their groceries as well as older customers who may have trouble navigating the store. As Target implements Drive Up in more stores across the country it can help the company better compete with Amazon’s delivery times.

Target has also developed rewards program for its loyal customers through its Target Circle rewards. The loyalty program earns customers 1% savings on purchases at Target, plus regular coupon deals in the Target app. The company also offers delivery through Shipt which delivers items to customer’s door in as little as an hour for $14 a month or $99 a year. Target’s loyalty programs, in-store pickup, and delivery options should put the retailer in good position to compete with Amazon’s supermarket campaign.

Target Enters Holiday Season Red Hot

Target impressed Wall Street again Wednesday with its third quarter performance where sales and EPS grew 4.7% and 24.8%, respectively. Comparable sales jumped 4.5% in the quarter. which drove sales the sales gain. The retailer’s digital channel also continued its growth with digital sales up 31%, driven by the same-day-fulfillment initiatives.

The company’s margins also expanded. Gross margin increased from 28.7% to 29.8%, and operating income jumped 22.3% to $1 billion. The strong overall performance in the third quarter led management to raise its full fiscal year guidance. Target now expects adjusted EPS of $6.25 to $6.45, up from a prior forecast of $5.90 to $6.20. For the fourth quarter, Target expects 3%-4% comparable sales growth and adjusted EPS of $1.54 to $1.74.

On that note, Target is now entering the pivotal holiday shopping season with loads of momentum. Target is preparing to cash in on the lucrative season by spending $50 million more on payroll during the fourth quarter than it did a year ago. The company hopes the larger workforce can better accommodate the influx of shoppers. 

Target Circle members will receive early access to deals during the holidays including Black Friday doorbusters. Target’s partnership with Disney (DIS - Free Report) should also help the retailer capture a larger portion of toy sales during the fourth quarter.

Takeaway

Target has been on an absolute tear lately with its stock almost doubling in 2019. With Amazon ramping up its efforts to establish itself in the supermarket space, Target has responded with its own delivery service and convenient loyalty programs. The retailer shows no signs of slowing down anytime soon as management has extended the company’s growth runway.

The company pays out a dividend that yields a solid 2.38%, which can add to the already substantial returns. Target’s earnings estimate revisions have trended higher, helping give the stock a Zacks Rank #2 (Buy). The retailer’s shares have now climbed over a 91% in 2019 and outpaced rivals such as Walmart, Costco (COST - Free Report) , and Kroger (KR - Free Report) .

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