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Target (TGT) Down 1.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Target (TGT - Free Report) . Shares have lost about 1.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Target due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Target Q1 Earnings & Revenue Top Estimates, Comps Up

Target Corporation came up with first-quarter fiscal 2020 results, wherein both top and bottom lines beat the Zacks Consensus Estimate and revenues grew year over year. Notably, earnings marked its fifth straight beat and comparable sales increased for the 12th successive quarter. Comparable sales particularly gained from strength in the digital channel, given customers’ increased shift to online shopping amid coronavirus-led social distancing. However, the bottom line tumbled year over year, bearing the unfavorable impacts of increased employee pay and benefits, along with higher investments undertaken to preserve safety and health of customers.

Target withdrew its fiscal 2020 guidance on Mar 25 due to the uncertainty surrounding the impact of COVID-19. Due to the prevailing ambiguity, management did not issue any guidance for the fiscal second quarter.

Let’s Delve Deeper

This operator of general merchandise stores reported adjusted earnings of 59 cents per share that surpassed the Zacks Consensus Estimate of 46 cents. However, the metric slumped 61.4% from the prior-year period. The bottom-line results reflect major additional employee payments and benefits, along with investments undertaken to preserve safety and health of customers and team members amid the coronavirus crisis.

The company generated total revenues of $19,615 million that increased 11.3% from the year-ago period and outpaced the Zacks Consensus Estimate of $19,100 million. We note that sales jumped 11.3% to $19,371 million, while other revenues were up 7.7% to $244 million.

Meanwhile, comparable sales for the quarter increased 10.8%, backed by a 12.5% jump in average basket – thanks to customers’ lesser but larger shopping trips amid the pandemic. The number of transactions dipped 1.5%. Comparable digital channel sales surged 141% and added 9.9 percentage points to comparable sales. Store originated comparable sales inched up 0.9%. The company witnessed an increase in market share in all five core merchandise categories. 

Gross margin contracted 450 basis points to 25.1% during the quarter on account of cost and inventory impairments; adverse category mix as customers hoarded stocks of lower-margin items like Hardlines, Essentials and Food & Beverage, as well as inflated digital and supply-chain expenses stemming from a major surge in digital volumes. Also, investments in wages and benefits clipped margins.

Operating income slumped 58.7% to $468 million, while operating margin collapsed 400 basis points to 2.4%.

Target’s debit card penetration shrunk 40 basis points to 12.7%, while credit card penetration fell 70 basis points to 9.7%. Total REDcard penetration declined to 22.4% from the year-ago quarter’s 23.5%.

Other Financial Details

During the reported quarter, Target repurchased shares worth $609 million and paid dividends of $332 million. The company had $4.5 billion remaining under its $5-billion share-buyback program approved in September 2019. However, on Mar 25, Target informed that it has suspended its share-buyback plan as part of the company’s efforts to preserve financial flexibility amid the crisis.

Target incurred capital expenditures of about $750 million during the quarter under review. Management now expects to incur capital expenditures of $3 billion or lower in fiscal 2020, in contrast to prior expectation of about $3.5 billion.

The company ended the quarter with cash and cash equivalents of $4,566 million, long-term debt and other borrowings of $14,073 million and shareholders’ investment of $11,169 million. We note that operating cash flow surged roughly $1 billion from the last year period.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 11.49% due to these changes.

VGM Scores

Currently, Target has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Target has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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