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Earnings Preview: Target

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Target Corporation (TGT - Free Report) , the operator of general merchandise and food discount stores in the United States and an S&P 500 company, is slated to report its second-quarter 2012 financial results before the opening bell on Wednesday, August 15.

The current Zacks Consensus Estimate for the quarter is pegged at $1.01 per share, portraying a decline of 1.9% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 98 cents and a high of $1.04 per share. The Zacks Consensus estimates revenue to be at $16,771 million for the quarter.

Recap of First-Quarter 2012

Target posted better-than-expected first-quarter 2012 results on the back of healthy sales. The quarter benefited from an early Easter and favorable weather conditions. The company delivered quarterly earnings of $1.11 per share that topped the Zacks Consensus Estimate of $1.01 and rose 11.5% from 99 cents earned in the prior-year quarter.

Total revenue climbed 5.9% to $16,867 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $16,871 million. Retail sales grew 6.1% to $16,537 million as shoppers are gradually opening up their wallets but still remain wary.

Minneapolis, Minnesota-based Target announced that comparable-store sales for the quarter rose 5.3% compared with a 2% increase registered in the prior-year quarter, and reflects the company’s most robust comparable-stores sales performance in a quarter in over six years. The number of transactions rose 2%, whereas the average transaction amount climbed 3.2% in the quarter.

Management Guided

Target, in its last earnings call, projected earnings between $1.04 and $1.14 per share for the second quarter and in the range of $4.60 to $4.80 for fiscal 2012.   

Zacks Agreement & Magnitude

We noticed that 3 out of 20 analysts covering the stock raised their estimates for the second quarter of 2012, whereas 2 analysts lowered the same in the last 30 days, which had no impact on the Zacks Consensus Estimate. Also in the last 7 days, no movement was noticed in the Zacks Consensus Estimate, as none of the analysts revisited their estimates.

The upward revision in the estimates was driven by healthy July comparable-store sales growth of 3.1%. Moreover, comparable-stores sales for the second quarter of 2012 increased 3.1%, in line with management’s expectation. However, what kept analysts wary was the performance of comparable-store sales for July compared with the prior-year period, when comps rose 4.1%.

Positive Earnings Surprise History

With respect to earnings surprises, Target has topped the Zacks Consensus Estimate over the last four quarters in the range of 3% to 10.8%. The average remained at 6.8%, suggesting that Target has outpaced the Zacks Consensus Estimate by that magnitude in the trailing four quarters. Given the past performance, we expect the company to outperform the Zacks Consensus Estimate in the upcoming quarterly results.

Let’s Conclude

Target is persistently striving to keep itself afloat in an economy which is still not completely recovered. The company’s P-fresh remodel program, 5% REDcard Rewards program, City Target stores, The Shops at Target initiatives and its foray into the foreign market are measures the company has taken in this regard.

Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that increased focus on consumable items should boost sales and earnings in a sluggish consumer environment. The company’s long-term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017.

The economy has not yet recovered fully. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.

Moreover, a greater concentration of the company’s revenue-generating capabilities in limited regions of the United States poses a competitive threat to Target, compared with Wal-Mart Stores Inc. (WMT - Free Report) and Costco Wholesale Corporation (COST - Free Report) , which are more geographically diverse.

Currently, we maintain our long-term Neutral recommendation on the stock. However, Target retains a Zacks #2 Rank that translates into a short-term Buy rating.

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