Nearly a year after its disastrous data hack, Target Corporation (TGT) is happy to forego some profitability if it can woo customers back to stores with discounts, a state of affairs that will be abundantly clear in Target earnings and holiday outlook on Wednesday.
Target earnings for the third quarter are really beside the point now. Profits, sales and margins may give us clues as to how its comeback is going, but the only thing the market cares about is the all-important holiday selling season.
Target has already made it clear that it intends to focus in on a limited number of categories where it can stand out in the upcoming blizzard of shopping. TGT has also duly warned Wall Street that it plans to attract customers with heavy discounts and promotions — and that will hurt Target earnings for the current quarter.
If it works, TGT will drive traffic at the expense of profitability, but the market is on board with the plan. After all, Target stock up 7.7% for the year-to-date after rallying in November. Indeed, TGT stock is back to levels last seen in summer 2013.
There is an upside to the data breach in which 40 million credit and debit cards were hacked. It means this year’s fourth quarter is coming up against easy comparisons against last year’s Target earnings. If Target earnings for the current quarter show its plan to increase traffic and sales worked over the holidays, it will be fair to say TGT is past that storm.
Target Earnings to Decline Year-Over-Year
As for third-quarter earnings on tap this week, analysts, on average, forecast Target earnings to decline to 47 cents a share from a year-ago profit of 56 cents. Revenue is expected to grow less than 2% to $17.56 billion.
Top-line figures and same-store sales results — a key measure of a retailer’s health — will be much more in focus than earnings in the most recent quarter. TGT has been trying to lure customers back all year with discounts and promotions, but it hasn’t worked so far. Heck, Target had to cut its earnings forecast twice this year, most recently in August.
Wall Street and the market , however, continue to give Target stock the benefit of the doubt, thanks to a rebound in sales over July and August on the back of a solid back-to-school campaign.
Target plans to follow that up with a number of gimmicks to boost sales over the holidays, such as starting promotions much earlier in the month this year, keeping longer store hours on Thanksgiving day and offering free shipping on anything purchased on its website.
Interestingly, even with the weight of the data breach and soft consumer spending on its back, Target stock still trades at a premium to its own average price-to-earnings multiples. Apparently, Wall Street sees TGT on the comeback trail. As an analyst at Stifel wrote to clients:
“Our checks suggest more vibrant store traffic and marketing could be occurring just as 4Q easy comparisons roll around. TGT seems to be more ‘on offense’ of late — we believe the ads are getting noticed and they played prime mover in holiday period free shipping.”
Bottom Line
If Target earnings and outlook on Wednesday support such optimism, the premium placed on Target stock looks reasonable, at least in the short run.
But the real test will be sales reports through the holidays, and for that, investors will have to stay tuned. Until we get more information, the prudent call on Target stock is hold.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
