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Target (TGT) Up 0.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Target (TGT). Shares have added about 0.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Target due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Target’s Q2 Earnings Beat, Comparable Sales Up 8.9% Y/Y

Target Corporation continued with its decent performance in second-quarter fiscal 2021, wherein both the top and the bottom lines not only surpassed the Zacks Consensus Estimate but also grew year over year. The quarter marked sixth straight sales and earnings beat. Notably, comparable sales increased for the 17th successive quarter. The metric gained from growth in both store and digital channels.

However, digital comparable sales grew at a lower rate compared with the year-ago period, when the pandemic was at its peak and consumers made bulk of their purchases online. Moreover, margins remained under pressure during the quarter, thanks to higher freight costs.

Without a doubt, Target has been focusing on store refurbishments, enhancing digital capabilities and expanding same-day fulfillment options, keeping in mind speed and convenience. We note that all five core merchandise categories registered positive comparable sales during the reported quarter. Markedly, this general merchandise retailer has kicked-off back-to-school season on a promising note.

Sales & Earnings Picture

Target reported adjusted earnings of $3.64 per share that outshone the Zacks Consensus Estimate of $3.48, and rose 7.9% from the year-ago period.

The big-box retailer generated total revenues of $25,160 million that increased 9.5% year over year and outpaced the Zacks Consensus Estimate of $25,066 million. We note that sales jumped 9.4% to $24,826 million, while other revenues rose 20% to $334 million. Markedly, the company’s owned brand sales grew in the mid-teens.

Let’s Delve Deeper

Rise in sales was led by Apparel, Food & Beverage, Essentials & Beauty, Home and Hardlines categories. While Apparel witnessed double-digit growth in sales, Home category saw low-single-digit increase. Within apparel, swim, kids, and young contemporary, all delivered comps in the low 20% range. Hardlines grew in mid-single-digits, while Essentials & Beauty registered high-single-digit growth. Within Essentials, baby care grew by more than 20% and both pets and healthcare saw mid to high teens growth. Food & Beverage delivered low-double-digit growth led by bakery, cafe, and deli businesses.

Stores fulfilled more than 95% of the company’s sales in the quarter. Same-day services (Order Pick Up, Drive Up and Shipt) grew approximately 55%. Sales fulfilled by Shipt were up nearly 20% year over year and sales through Drive-Up were up more than 80% during the quarter. We note that Order Pickup rose more than 30%.

Meanwhile, comparable sales for the quarter increased 8.9%, backed by 12.7% jump in number of transactions. However, average transaction amount dropped 3.4%. Again, digital comparable sales grew 10%, while comparable stores sales rose 8.7% during the quarter.

Target’s debit card penetration contracted 20 basis points to 11.6%, while credit card penetration remained flat at 8.7%. Total REDcard penetration declined to 20.3% from the year-ago quarter’s 20.5%.

Margins

Gross margin shrunk 50 basis points to 30.4% during the quarter owing to higher merchandise and freight costs, partly offset by the benefit of low markdowns, favorable category mix, and a shift in fulfillment mix into lower-cost same-day fulfillment options. Meanwhile, operating margin shriveled 20 basis points to 9.8%.

Other Financial Details

During the second quarter, Target paid dividends of $336 million. This reflected an increase of 3% in the dividend per share. The company repurchased shares worth $1.5 billion, thereby retiring 6.6 million shares at an average price of $233.81. At the end of the quarter, the company had roughly $1.8 billion remaining under its share-buyback program approved in September 2019. The company’s board of directors unveiled a new $15 billion share buyback program.

The company ended the quarter with cash and cash equivalents of $7,368 million, long-term debt and other borrowings of $11,589 million and shareholders’ investment of $14,860 million. In the first-six months of fiscal 2021, the company made capital expenditures of just over $1.3 billion. Management now envisions full year capital expenditures to be approximately $3.5 billion. For fiscal 2022, the company anticipates capital expenditures in the range of $4-$5 billion.

Outlook

Management now envisions high single digit growth in comparable sales for the second half of fiscal 2021. Target had earlier guided positive single-digit comparable sales growth for the last two quarters of the fiscal year. It currently expects full-year operating margin rate to be 8% or higher compared with 7% in fiscal 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 6.97% due to these changes.

VGM Scores

Currently, Target has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Target has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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