Target Corporation (NYSE:TGT) shares were sent soaring on Wednesday morning after the retailer topped third-quarter earnings estimates as well as revenue estimates. However, the retailer’s business continues to broadly deteriorate, so there’s no real assurance that this rally in Target stock will last once the dust settles.
For the quarter ending in late October, TGT reported adjusted income of $1.04 per share — better than the 86 cents it earned in the year-ago quarter, and topping analyst expectations of 83 cents per share of Target stock. Revenues of $16.44 billion also beat estimates, which were set at $16.3 billion, though it was a steep step down from last year’s $17.6 billion.
CEO Brian Cornell commented:
“We are very pleased with our third quarter financial results, which reflect meaningful improvement in our traffic and sales trends and much stronger-than-expected profitability. Favorable gross margin mix and efficient execution by our team drove third quarter EPS performance well beyond our guidance. We also continued to gain market share in key Signature Categories and saw unexpectedly strong sales in the Back-to-School and Back-to-College season.”
Target has topped analyst estimates more often than not since its fiscal 2014 (calendar 2013) lull. Still, buyers of TGT stock might be a little overzealous this morning.
A Closer Look at Target Earnings Raises Questions
While Target topped estimates, few other metrics looked encouraging. For instance, same-store sales were down 0.2%, and although income increased, overall revenue fell 6.7%.
Target hadn’t given a specific same-store sales growth expectation for Q3, but did suggest before posting its quarterly numbers on Wednesday that same-store sales would be flat to down 2% during the second half of the current year.
That didn’t prevent analysts from making their own same-store sales conjectures for the third quarter of fiscal 2017, though. They were calling for a 1.2% dip, on average, in Q3, and had projected a 1.5% decline in same-store sales in the fourth quarter.
The bottom line (on a per-share basis) has more or less made progress for years, even with the company’s multiple stumbles. But aggressive stock buybacks have been the big driver of that growth. Actual GAAP and non-GAAP income has been slowly deteriorating for several years now. This trend didn’t change considerably last quarter, when stripping out the effects of some extreme cost-cutting.
The specifics: Between the third quarter of last year and the third quarter of this year, the total number of outstanding shares of TGT stock was pared back from 629 million to 575 million. Net income of $608 million was 10.7% better than than the year-ago income figure of $547 million. However, gross profits actually fell 3.9% from $5.2 billion to $5 billion.
All of the income growth was driven by nearly a $400 million reduction in selling and administration expenses.
Initiatives, Decisions Not Panning Out Well
For years, Target was the name to beat in the general merchandise store space. Riding the momentum of its “cheap chic” shtick at the same time rival Wal-Mart Stores, Inc. (NYSE:WMT) finally paid the price for years of sloppy decisions, TGT saw solid sales growth all the way through calendar 2013.
As is all too often the case, however, Target got too comfortable at the exact wrong time.
Walmart finally started to overhaul itself at the same time at the same time “cheap chic” fell out of fashion — literally and figuratively — as the so-called ‘fast fashion’ movement become a hot button Target was never built to press.
Already in a bit of a tailspin, Target stock was hammered in late 2013 and early 2014 in the wake of an announcement that the retailer had been hacked, and credit card information for 40 million customers had been exposed. Although TGT managed to eventually make higher highs by 2015, sales never recovered. Income turned choppy and uninspiring. Some customers struggled to forget the gaffe.
Other customers have struggled to look past a decision made by Cornell in April of this year, allowing customers to use the restroom they best identified with rather than requiring them to use the one that was anatomically appropriate. Millions promptly began a boycott of the company, and arguably augmented the toll taken on Target stock. Last quarter’s top line was 8% lower on a year-over-year basis, and net income fell 10%.
That boycott still might be a drag on Target’s bottom line.
In the meantime, Target has worked to expand its grocery business, adding more perishables and meats to its selection as a means of attracting more customers. It hasn’t gone well so far, however, with reports that many of those perishables spoiling before they were sold. Falling food prices in the meantime haven’t helped.
Last quarter’s grocery segment details weren’t available with the Target earnings report, but will be fleshed out during the conference call. The head of groceries, Anne Dament, recently announced she would be stepping down, perhaps underscoring the division’s problems.
Looking Ahead for Target Stock
The retailer said it expects to earn between $1.55 and $1.75 per share for its fourth quarter, which will translate into full-year earnings of between $5.10 and $5.30 per share of Target stock. Analysts had been expecting a fourth-quarter bottom line of $1.60 per share, and $4.94 for the whole year.
But the full-year outlook from analysts wasn’t counting on the 21-cent beat.
Although Target didn’t provide revenue guidance for the quarter currently underway, it did suggest same-store sales would roll in between 1% lower and 1% higher versus last year’s numbers, up slightly from its previous guidance.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
