Target Corporation (TGT) Stock Finally Shows a Glimmer of Promise

There's still a lot of salvage work to be done, but the struggling retailer has proven TGT stock has a fighting chance

By James Brumley, InvestorPlace Feature Writer
Sell TGT Stock Into Strength as Amazon Takeover Unlikely

Source: Mike Mozart via Flickr (Modified)

For far too long, Target Corporation (NYSE:TGT) has been fighting a losing battle. If it wasn’t dealing with self-inflicted problems, it was facing new and improved competition, online and offline. The end result? As of Tuesday’s close, TGT stock was down 34% from its mid-2015 peak, with investors increasingly thinking the retailer wouldn’t be able ever dig its way out of the hole.

While there’s still much to be proven, it may be time to at least put Target back on your watchlist. The company dished out a pretty decent second quarter report on Wednesday morning … decent enough to send the stock up 4% in early trading.

The light at the end of the tunnel may not be an oncoming train after all.

Target Q2 Earnings Recap

For the quarter ending in July, general merchandise retailer Target turned $16.43 billion (up 1.6% year-over-year) worth of revenue into net income of $1.23 per share (up 6%). Analysts were expecting sales of $16.26 billion and earnings of $1.17 per share.

Perhaps more important, same-store sales grew 1.3%. That was the first forward progress for the metric in a year.

CEO Brian Cornell commented on the company’s second-quarter numbers:

“We are pleased that second-quarter traffic increased more than 2 percent, reflecting growth in both our store and digital channels. We continue to focus on our long-term strategy, as we work to transform every part of our business and build an even better Target that will thrive in this new era in retail. While our recent results are encouraging, we will continue to plan prudently as we invest in building our brands, our digital channel, the value we provide our guests and elevating service levels in our stores.”

E-commerce sales were up 32%, further accelerating growth for what used to be one of Target’s weak points.

Light at the End of the Tunnel?

Between the ongoing growth of e-commerce giant, Inc. (NASDAQ:AMZN) and improving competition from Wal-Mart Stores Inc (NYSE:WMT), Target has experienced several years of dwindling revenues and earnings. Granted, Target didn’t do itself any favors either, with many of its own missteps giving consumers reason to shop elsewhere.

The headwind became palpable in 2014 after Target disclosed a data breach in late 2013 that exposed credit card data of 40 million customers. TGT stock recovered, but hasn’t thrived since.

The gaffe ultimately cost then-CEO Gregg Steinhafel his job, though it was hardly his only misstep. Under Steinhafel, Target’s online business ceded more ground to rivals than it should have, and the company’s merchandising decisions were less than thrilling.

Cornell hadn’t fared much better. The retailer saw (very) modest sales growth in 2014 and 2015, but 2016 was another step in the wrong direction,

Much of that wweakness has to be attributed to the April-2016 decision from the company to allow its LGBT customers to use whichever restroom they’re most comfortable with, alienating another swath of its customers that ultimately boycotted the company’s stores.

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Target’s ambitions to expand its grocery business haven’t helped much either; consumers just aren’t responding. They are responding to things like Target’s private label brands, however. UBS analyst Michael Lasser commented before earnings:

“With four more exclusive brand introductions set for this fall, we believe Target should continue to see some tailwinds from private label. On the other hand, we think its food offering and in-stocks remain works in progress.”

Other initiatives also offer measurable hope. In June, Target implemented plans to better integrate the in-store and online experience, including next-day delivery of basic staples in select markets. If the pilot goes well, it could be expanded to more geographies. The initiatives also include an option for shoppers to make payments for in-store purchases using their smartphones.

The moves haven’t been cheap. Some experts believe spending on those internet and mobile shopping will shave $1 billion off the bottom line this year. The expense is mostly regarded as worth it, though, even beyond last quarter’s 32% increase in digitally driven revenue.

Looking Ahead for TGT Stock

Daybreak is evident with today’s news, suggesting at least some of the initiatives are starting to bear fruit. One good quarter doesn’t make or break a trend, but all trends start with that first good quarter.

For the quarter currently underway, analysts are looking for a profit of 77 cents per share of TGT stock and sales of $16.34 billion, both of which are down from year-ago levels of $1.04 per share and $16.44 billion, respectively. For the full year, the pros are looking for a bottom line of $4.39 per share, down from last year’s $5.01. The revenue outlook of $70.03 billion is slightly higher than last year’s actual top line of $69.5 billion.

Target upped the ante somewhat on those outlooks. The company offered profit guidance of between 75 cents and 95 cents per share of TGT stock for the third quarter of the year, and earnings guidance of between $4.34 and $4.54 for the full year.

Both revisions were upward.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter here.

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