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Target Falls on Earnings Miss

- By Sydnee Gatewood

Retailer Target Corp. (TGT) reported fourth-quarter and full-year 2017 earnings before the opening bell on Tuesday.

The Minneapolis-based company, which is the second-largest discount retailer in the U.S., posted adjusted earnings per share of $1.37 for the quarter, just shy of Thomas Reuters' estimates of $1.38. The company said its earnings were negatively impacted by a hike in employee wages.


Quarterly revenue, however, grew 10% from the prior-year quarter to $22.8 billion, beating expectations of $22.5 billion.

For the year, Target recorded adjusted earnings of $4.71 per share on $71.8 billion in revenue. The company also received a $36 million tax benefit from the U.S. Tax Cuts and Jobs Act.

Shares fell more than 3% in premarket trading following the announcement.

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Spurred by strong holiday sales, Target's same-store sales, an important metric for retailers, for the quarter increased 3.6%, exceeding expectations of 3.1% growth. Same-store sales for the year grew 1.3%. In addition, the number of customer transactions and the average amount customers spent per trip jumped during the quarter. Traffic was up more than 3%.

As a result of several initiatives Target has made, which include expanding its online services and introducing in-store pickup, the company's online presence is also improving. Target's online sales for the quarter accounted for 8.2% of its revenue mix, up from 6.8% last year. In addition, 2017 marked the fourth consecutive year Target saw more than 25% digital sales growth. During the holiday season, online sales grew 29%, contributing 1.8 percentage points to the retailer's same-store sales growth.

Chairman and CEO Brian Cornell said the company's performance was powered by several investments it made throughout the year, which included refurbishing stores and opening smaller-format locations, launching new furnishing and apparel brands and expanding its online services.

"Our team's outstanding execution of Target's strategic initiatives during the year delivered strong fourth quarter traffic growth in our stores and digital channels, which drove healthy comparable sales in every one of our five core merchandise categories," he said. "At our Financial Community Meeting later this morning, we will outline our plans to continue investing in our team and make 2018 a year of acceleration in the areas that set Target apart- our stores, exclusive brands, and rapidly-growing suite of fulfillment options."

Among the fulfillment options Cornell referenced is its recent acquisition of delivery service Shipt. In order to compete with Amazon (AMZN) and Walmart (WMT), Target bought the company for $550 million late last year with the intent to introduce same-day delivery services. It also acquired transportation company Grand Junction last August.

Krista Fabregas, an analyst with FitSmallBusiness.com, believes that through these investments, Target is proving it can effectively compete in an Amazon-driven retail environment.

"Clearly, it can," she wrote in a research note. "Now the question is whether or not it can squeeze out more profit while battling Amazon on every front. In this challenge, its smaller-format stores and same-day delivery are likely to drive the charge in 2018, since that's what gives them the convenience edge over Amazon in many markets."

For 2018, Target projects a low single-digit increase in same-store sales. Earnings per share are expected to fall between $5.15 and $5.45, compared to analyst expectations of $5.27.

"While we have a lot left to accomplish, our progress in 2017 gives us confidence that we are making the right long-term investments to best position Target for profitable growth in a rapidly changing consumer and retail environment," Cornell said.

With a market cap of $39.11 billion, Target shares were trading around $71.95 Tuesday morning with a price-earnings ratio of 15.08, a price-book ratio of 3.51 and a price-sales ratio of 0.60. GuruFocus estimates the stock fell 6% in 2017. Year to date, it has gained 6%.

In the fourth quarter, gurus George Soros (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio) established positions in the stock, while Ray Dalio (Trades, Portfolio), Mairs and Power (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss and several others trimmed their holdings. With 3.69% of outstanding shares, Dodge & Cox is the retailer's largest guru shareholder.

Disclosure: No positions.

This article first appeared on GuruFocus.


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