Target (TGT) reported healthy fiscal first-quarter results for the period ending on May 5. Target’s digital push, exclusive product launches, and store remodeling are driving the company’s traffic and sales. Target’s EPS (earnings per share) returned to the growth trajectory in the fiscal first quarter after declining in the past several quarters.
Despite numerous positives and continued strength in its digital business, Target stock fell 5.7% and closed at $71.17 on May 23. The earnings miss and soft margin trend irked investors. Target’s first-quarter adjusted EPS of $1.32 rose 10% on a YoY (year-over-year) basis and fell short of analysts’ expectation of $1.39.
Lower sales of high margin products due to negative weather conditions, higher digital fulfillment costs, investments in store remodels, and increased wages restricted Target’s bottom-line growth in the fiscal first quarter.
A significant decline in the effective tax rate (22.6% in the first quarter compared to 34.5% last year), lower interest expenses, the outstanding share count, and an improvement in the comps helped Target’s EPS return to the growth trajectory.
In comparison, Walmart’s (WMT) first-quarter EPS surpassed analysts’ expectation and jumped 14% on a YoY basis, which reflected a lower tax rate. However, investments in growth measures remained a drag. Analysts expect Costco (COST) to continue to report stellar growth in its EPS, driven by its industry-leading comps and lower tax rate.
Target’s management expects to sustain the growth momentum in its EPS in upcoming quarters. Target’s second-quarter EPS is projected to be $1.30–$1.50. Meanwhile, the fiscal 2018 EPS is expected to be $5.15–$5.45.
A significant decline in the effective tax rate, increased sales of high margin products, improved traffic, and lower interest expenses are projected to drive Target’s bottom line. However, margin headwinds and investments in growth initiatives will likely remain a drag.