What Owners of Target Stock Need to Know Before Wednesday (TGT)

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Target (TGT) will unveil its second-quarter results Wednesday morning, just a few hours after rival Walmart (WMT) does the same.

What Owners of Target Stock Need to Know Before Wednesday (TGT)If the pros are right, TGT stockholders will relish in Target’s much-improved earnings, as the company seems to be shrugging off the costly burdens that held Target down over the last couple of years.

Given the big beats and increased profits we’ve seen in each of the past two Target earnings reports, the market may have good reason for its confidence heading into the news.

However, could expectations from current owners of Target stock be dangerously high?

Target Earnings Outlook

As of the most recent look, analysts expect the retailer to post earnings of $1.11 per share on $17.4 billion worth of revenue.

Expectations for Target’s bottom line compare favorably to the 78 cents per TGT stock earned in the retailer’s year-ago period. But while TGT bulls cheer Target’s expected 42% increase in earnings, the number it is increasing from is uncharacteristically low.

How so? In the second calendar quarter of 2014 (the company’s fiscal 2015) Target was still reeling from a late-2013 credit card data breach that proved costly and kept many concerned customers out of store altogether.

As for the top-line expectation, the prior quarter’s estimate is right in line with the $17.4 billion worth of sales Target generated in the same quarter from a year earlier.

3 Things for TGT Owners to Mull

As is always the case, Target’s earnings are only a barometer to interpret the whole story. Confidence, or lack thereof, in initiatives and people can still dictate how TGT’s numbers are digested by the market.

To that end, there are three overarching forces in effect that current and would-be TGT shareholders need to chew on, and maybe even query Target management about if given an opportunity to do so during the earnings call.

In no certain order:

Turnover at the Top: Employees come and go, even the ones at the top, but Target’s recent restructuring of its upper echelon is curiously timed. After TGT’s key merchandising executive Jose Barra left, John Mulligan left his post as Target’s CFO to assume the role of a newly created COO position, with Cathy Smith filling the CFO shoes left by Mulligan. Were these changes put into place to solve a particular problem? Perhaps a COO role was a necessity for the facilitation of growth. Or, more dubiously, maybe current CEO Brian Cornell is struggling with some aspects of the business.

TGT e-Commerce: It’s no coincidence that Target isn’t often part of the discussion of online shopping wars that usually (eventfully) boil down to a battle between Amazon (AMZN) and Walmart. That’s because Target isn’t a player in the arena: Digital sales only accounted for less than 3% of Target’s first-quarter revenue, which is roughly like Walmart’s 2.5%. But Walmart’s e-commerce efforts are accelerating, while Target’s e-commerce efforts are oddly lethargic. The exit of Alan Wizemann will only dampen the already feeble online sales effort, leaving Target stock owners wondering if the company will ever capitalize on the Internet.

Sale of Target’s In-Store Pharmacies to CVS: In June, Target announced it would be passing along its 1,600 in-store pharmacies to CVS Health (CVS), who will reestablish its own namesake stores at those same locations. The deal will net Target $1.9 billion in cash, but clearly there’s more to the story. To what extent will Target’s abdication of its own pharmacy business help or hurt the value of Target stock? It wasn’t a profitable venture, but it produced $4 billion worth of revenue for the parent company last year. It remains to be seen if this is a win or a loss for Target.

Bottom Line for Target Stock

Giving credit where it’s due, Target is coming out of its security-breach gaffe and lackluster merchandise (and pricing) selections in a strong fashion.

What we see on Wednesday may be the first real evidence that all the recent work is paying off. A beat of the top- and bottom-line estimates could go miles in convincing the market of TGT’s turnaround, and with a forward price-to-earnings of 15.6, even a decent value argument could be made for Target stock.

The biggest potential pitfall, however, is that Target isn’t ready to start breaking records just yet, and its income of $1.11 per share of Target stock would be Target’s best second quarter in years. Sometimes, even the gigantic retailers need to relearn how to walk before running.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/target-stock-tgt-stores-earnings/.

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