Target (TGT) stock looks ready for more market-beating returns this year after releasing an earnings report that exceeded expectations.
Skepticism is warranted anytime a company like TGT rolls out a new strategic plan intended to turn things around. Even if it’s not billed as an official “turnaround” plan, the aim is the same.
And as Warren Buffett has noted, the problem with most turnarounds is that they don’t turn.
That is why Target’s most recent quarterly performance is so encouraging. Over the last year, Target’s new leadership has focused on TGT’s strongest categories (apparel, home goods, toys) and ditched the weaker parts of the business (exiting Canada and selling its pharmacy operations).
The result has been an increase in traffic and same-store sales — important measures of a retailer’s health.
Throw some costs cuts into the mix (TGT aims to slash $2 billion in expenses over the next couple of years), and surprisingly Target’s earnings are growing faster than its sales.
In the most recent quarter, Target’s earnings topped out at $753 million for $1.18 a share. After stripping out discontinued operations and other expenses, earnings were $1.22 a share, which beat the Wall Street estimate of $1.11, according to a survey by Thomson Reuters.
That’s a big earnings beat.
The primary cause of TGT’s upside surprise? Cost cuts. While revenue growth was solid — rising 2.8% to $17.4 billion — that’s not how TGT grew adjusted operating earnings by around 20% for the quarter.
More importantly, at least for short-term performance, Target’s sales topped analysts’ average estimate of $17.4 billion. And same-store sales growth of 2.5% was better than the 2.2% forecast, driven by TGT’s style, baby, kids and wellness products.
Target also benefited from easier year-over-year comparisons. Costs related to its massive data breach came to a penny a share in the most recent period, vs. 11 cents a share a year ago. The early retirement of debt also contributed to Target’s big earnings beat, as net interest expense plunged by more than 65%.
Implications for TGT Stock
These earnings go a long way toward reassuring the market that Target is back on track, and that should lead to multiple expansion … eventually.
The company probably needs to have a strong back-to-school season before sentiment turns more positive on Target stock. And if it looks good heading into the holiday season, you can bet investors will be willing to pay more for forward earnings.
After all, Target stock looks like a good deal at current valuations: Investors are willing to buy TGT for just 16 times forward earnings even though the long-term growth rate is nearly 13%. That’s a glaring indication of the market’s skepticism of Target stock. Fair enough.
In addition to a fairly long track record of company-specific problems — for example, the Canada expansion — Target stock faces some economic headwinds.
Consumers are more selective than ever when it comes to allocating their discretionary dollars. That has led to some choppy and sluggish retail sales this year.
Regardless, Target earnings reveal a much healthier retail operation. With Target stock now up 5% for the year-to-date vs. a 0.6% gain for the S&P 500, you can bet TGT stock will continue to outperform.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.