To the casual observer, Target Corporation (TGT) stock seems like a pretty ho-hum investment, one that’s not bound to stand out in one way or another anytime soon. But the stock market can be deceptive, and great deals often appear right under our noses.
Amazon.com (AMZN) is the unrivaled king of e-commerce, and its lead continues to widen year after year. Unlike other traditional U.S. retailers, it’s also competing in high-tech, high-margin industries unrelated to retail, like cloud computing. With Walmart (WMT) the largest retailer by revenue, what exactly does TGT stock offer?
The answer? Value. Great value and impressive execution.
TGT Earnings: Guidance Is MVP
Target’s fourth-quarter results actually weren’t exemplary. In fact, the company missed — barely — on both earnings per share and revenue.
Adjusted EPS came in at $1.52, missing the $1.54 per share that analysts expected. Revenue clocked in at $21.63 billion, down 0.6% year-over-year, missing the $21.75 billion Wall Street was looking for.
So how come Target stock is such a steal if earnings are ho-hum and revenue is falling?
Well, revenue took a big hit when Target sold its pharmacy and clinic business to CVS (CVS) in mid-December, which the company says dented revenue to the tune of $550 million. Since Target’s fiscal fourth quarter ends at the close of January, TGT went half a quarter without the benefit of its pharmacy biz.
Plus, there were some genuine bright spots in the report, most notably when it came to forward guidance. While we all love to see a good earnings beat, guidance is oftentimes far more influential in determining how a stock will perform. After all, investing is basically about predicting the future.
Management expects TGT stock to earn between $1.15 and $1.25 per share in the first quarter of fiscal 2016; the midpoint of $1.20 is a penny better than the $1.19 Wall Street had been expecting. Target also guided for full-year EPS between $5.20 and $5.40, way higher than the $5.16 consensus figure.
Importantly, Target’s same-store sales increased by 1.9%, mostly driven by traffic growth of 1.3%. Again, no one’s under the illusion Target is some high-growth retail phenom, but this is great when viewed in conjunction with Walmart’s recent results — U.S. same-store sales increased just 0.6% there.
Driving results were strong performances in a few core categories that TGT has chosen to focus on: Style, Baby, Kids and Wellness. They grew at three times the rate of the company as a whole.
Bottom Line on Target Stock
Finally, and perhaps most importantly for the long term: Target’s online sales soared, jumping 34% year-over-year. This is amazing for a company of Target’s size — indeed, these are Amazon-esque numbers.
In fact, they’re better than Amazon, which grew sales at “only” 28% in the most recent quarter. Walmart’s digital sales, by comparison, were up just 8%. Womp-womp!
In my Target earnings preview, I noted that while Target stock looked like a good value for the long term, it was an uncertain play just before earnings. That idea still seems to hold water today — is anyone really getting rich off a 2% pop? — but I’m much more confident in shares after Wednesday’s report.
Now, with brighter guidance, online sales booming and a still-cheap valuation, TGT looks like a far more compelling buy than it has in a long time.
As of this writing, John Divine was long AMZN. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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