Fundamentals look strong
Target (TGT) impressed investors with its financial performance in the first three quarters of fiscal 2018. We expect Target to end fiscal 2018 on a strong note due to strong holiday sales numbers. Target’s comparable sales rose 5.7% during the holiday season due to continued strength in its e-commerce platform. The strong growth indicates that Target will likely sustain the momentum in the fourth quarter.
Target’s expanded digital fulfillment options, remodeling new stores, and new small-format stores continue to drive the traffic and support the comps growth. We expect improved comps and a considerable decline in the effective tax rate to drive double-digit growth in Target’s bottom line.
However, the margins are expected to remain weak, which could limit the upside. Higher digital fulfillment costs and investments in growth initiatives are taking a toll on the profitability of big-box retailers like Target, Walmart (WMT), and Costco (COST). Target’s management expects the margins to contract in the fourth quarter. However, the rate of decline will likely decelerate, which is positive.
We expect these retailers to sustain sales and earnings growth momentum in 2019. Improved sales and cost-savings are expected to cushion the margins in upcoming quarters.
So far, Target shares have risen 10% this year. Target has generated better returns than Walmart, Costco, and Kroger. Walmart, Costco, and Kroger stock have risen 5.1%, 4.5%, and 5.3%, respectively, on a year-to-date basis.