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Factors to Know Ahead of Target's (TGT) Q1 Earnings Release

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Target Corporation (TGT - Free Report) is slated to release first-quarter fiscal 2020 results on May 20. The company delivered a positive earnings surprise of 1.8% in the last reported quarter and outperformed the Zacks Consensus Estimate by roughly 9%, on average, in the trailing four quarters.

The Zacks Consensus Estimate for first-quarter earnings has gone down 14.4% in the past seven days to 77 cents per share. Further, this suggests a slump of 49.7% from the figure reported in the year-ago quarter. Nonetheless, the consensus mark for revenues stands at $18.77 billion, indicating a rise of 6.5% from the year-ago period’s reported figure.

Target Corporation Price and EPS Surprise

Key Factors to Note

Target recently provided a financial update to its first-quarter performance, as of Apr 23. The company said that it registered a sharp rise in comparable sales, courtesy of booming digital sales as consumers are buying essentials from home amid the lockdown. Digital sales started to shoot up in the latter part of March. The trend continued in April and accelerated significantly from the middle of the month. The company witnessed higher demand for same-day fulfillment services and market-share gains across core merchandising categories.

The company saw more than 7% advancement in comparable sales in the first quarter (as of Apr 23), versus 1.5% reported in the final quarter of fiscal 2019. This reflects a marginal fall in sales at stores but more than 100% growth in digital channels. Notably, comparable sales across the company’s core merchandise categories increased more than 20% in Essentials and Food & Beverage, more than 16% in Hardlines and marginally in Home. However, the Apparel & Accessories performance remained soft, as comparable sales in this category declined more than 20% year over year.

In April (till 23), Target registered comparable sales growth of more than 5%, reflecting digital comparable sales improvement of more than 275%. However, comparable store sales declined in mid-teens. The metric improved more than 12% in both Essentials and Food & Beverage categories, more than 30% in Hardlines and in high teens for Home. As usual, comparable sales across Apparel & Accessories category plunged more than 40%. In March, comparable sales rose in low-double digits. This reflected a mid-single-digit increase in stores and more than a 100% jump in digital channels. During February, comparable sales grew about 3.8%.

Clearly, coronavirus-led stockpiling of essential items along with consumers’ increased shift to online purchasing seems to have worked well for Target’s sales in the quarter under review.

However, the company was skeptical about first-quarter profit due to a number of factors. While providing its financial update on Apr 23, management highlighted various factors that are likely to have adversely impacted profitability in the quarter under review. These include investments in pay and benefits for frontline team members, shift in channel mix toward digital fulfillment, transition in category mix toward lower-margin categories and inventory write-downs in Apparel & Accessories due to a sharp deceleration in the sales trend. Management stated that cumulatively these factors are expected to have hurt the operating margin rate by more than 5 percentage points in the first quarter.

What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for Target this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Target carries a Zacks Rank #3 and an Earnings ESP of -47.30%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks With Favorable Combinations

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

Kroger (KR - Free Report) has an Earnings ESP of +8.48% and a Zacks Rank #2.

Lowe’s Companies (LOW - Free Report) has an Earnings ESP of +4.06% and a Zacks Rank #3.

Big Lots (BIG - Free Report) has an Earnings ESP of +18.72% and a Zacks Rank #3.

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