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Why Target Could End Fiscal 2018 on a Strong Note

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Dec. 4 2020, Updated 10:53 a.m. ET

Sustained growth in sales and earnings

Investors punished Target (TGT) stock following the company’s sluggish margins during the third quarter of the fiscal year. Target’s gross and operating margin contracted on both a sequential and a year-over-year basis, which didn’t go over well with investors.

However, the company sustained its momentum in sales and earnings despite these challenges. Target’s third-quarter comps rose 5.1%, which was higher than the 4.8% increase it registered during the first half of fiscal 2018. Traffic remained strong and increased 5.3% during the third quarter. Also, the company continued to grow its earnings at a double-digit rate, which is impressive. Target’s third-quarter EPS rose more than 20%. However, earnings remained shy of analysts’ expectations, reflecting pressure on margins from increased digital fulfillment costs.

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Could Target gain from the holiday season?

We believe Target remains well positioned to gain from increased consumer spending during the holiday season. The company’s digital efforts—including same-day delivery, delivery through stores, and Drive-up services—are expected to drive traffic. Plus, a focus on merchandising through exclusive brand launches should further support the top-line growth rate.

Target’s management expects its comps to increase 5% during the fiscal fourth quarter, which is encouraging. Meanwhile, its EPS are projected to continue to benefit from higher comps, lower interest expenses, and a decline in the effective tax rate.

Target’s profit margins are expected to fall during the fourth quarter of the fiscal year. However, the decline is expected to decelerate.

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