Target Corporation (NYSE:TGT) released its Q3 2017 earnings Wednesday morning before the markets opened, and although the company beat analyst expectations for revenues, earnings and same-store sales growth, TGT stock dropped almost 10% on the news.
Why the drop?
The company gave a very cautious holiday outlook that sees adjusted earnings per share between $1.05 and $1.25 per share, well below the $1.24 analysts were expecting.
A lot is riding on this holiday season for CEO Brian Cornell. With a good showing, TGT stock is off to the races. With a bad performance, he could be out the door. If it’s the latter, you can forget about TGT stock hitting $80 in 2018. However, the former almost certainly guarantees revisiting $80 or possibly $100 by the end of next year.
This clearly isn’t the start he was looking for.
However, let’s assume TGT stock can hit $80 in 2018. Here are three things it needs to deliver for investors.
The Customer Experience
Target held its 2016 annual financial community meeting on Mar. 2 of last year in New York City. While there, Cornell answered five questions for A Bullseye View, Target’s corporate newsletter.
Cornell was asked what he was focusing on in the year ahead. He responded by saying the company wanted to provide a “seamless, reliable and enjoyable guest experience each and every time.”
Well, the best indicator of a happy “guest,” as Target calls customers, is to deliver positive same-store sales growth during the all-important holiday season.
How did TGT do last holiday?
Same-store sales in Q4 2016 declined 1.5%, 340 basis points lower than a year earlier. Broken down by channel, brick-and-mortar stores saw a 3.3% decline, while e-commerce delivered a 1.8% increase, 50 basis points higher than Q4 2015.
In Q2 2017, overall same-store sales grew by 1.3%, 240 basis points higher than a year earlier on the back of positive growth at its physical locations, which was a good sign. In the third quarter, they grew 0.9%, 110 basis points higher than last year.
As part of its Q2 2017 guidance, Target said that it expects full-year same-store sales to be flat, about the same as last year, possibly a bit higher. Now, it sees full-year same-store sales growing by as much as 1%. That’s very good news.
We know that Target’s online sales continue to grow — Q3 2017 digital sales increased by 24%, about the same growth as last year — but to get to $80 and beyond, Target likely needs to deliver no worse than flat growth at its physical stores for the entire 12 months. Through the first nine months of the year, they’re down 0.6%.
It’s going to be close, but like the company’s prospects, I’m cautiously optimistic.
New Products for Target
Target’s adding eight new store brands for the holiday season including Hearth & Hand by Magnolia, the brand created by HGTV sensations Chip and Joanna Gaines.
“For Hearth & Hand with Magnolia, we worked closely with Chip and Joanna to create an experience that will stop shoppers in their tracks,” stated Erika De Salvatore, Target’s vice president of visual merchandising. “It’s big, it’s bold, and it truly feels like we’re bringing a little piece of the Magnolia Silos to guests everywhere.”
These are the kind of innovations Target’s customers have come to expect over the years. To keep its business moving in the right direction, partnerships like the one with the Gaines’ is the best way I can think of to keep shoppers coming back for more.
TGT Share Repurchases
I’m not a fan of buybacks because companies tend to repurchase their shares at 52-week, five-year or all-time highs, ostensibly defeating the purpose of the capital allocation lever.
However, with TGT stock down 31% from its five-year high of $85.81, trailing 12-month free cash flow of $4.8 billion, and $4.0 billion remaining on its $5-billion share repurchase program, there couldn’t be a better signal to investors that TGT stock is ready to rocket into orbit.
Through the first nine months of the year, Target’s repurchased $757 million of TGT stock, down considerably from the $3.0 billion bought back in the same period last year. Going forward, it needs to do more.
Bottom Line on TGT Stock
The Associated Press recently asked Cornell some questions about the holiday season.
“The consumer has been incredibly resilient,” the Target CEO stated. “I look at the latest consumer confidence numbers. They look really positive, and we’re seeing traffic up at the stores. We’re seeing visits (to our) store site grow.”
Okay, the table’s been set. Can Target deliver an $80 stock in 2018? It’s going to be even tougher after the latest hit to its share price.
I’ll reserve judgment until after Black Friday, but business does appear to be getting stronger. And that’s all you can ask for as an investor.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
