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Target Beats Q4 Estimates, Momentum Might Continue

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Target’s fourth-quarter estimates

On March 5, Target (TGT) shares closed 4.6% higher following the company’s better-than-expected fourth-quarter results. The fourth quarter ended on February 2. Target’s top line remained flat on a YoY (year-over-year) basis. However, the sales beat analysts’ estimate due to stellar comps growth. Target’s comps rose 5.3% in the fourth quarter due to strong traffic growth.

Target’s sales remained strong in-store and online. The company witnessed market share gains across all five of its core categories.

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Target’s gross margin continued to slide. However, the rate of decline decelerated sequentially. Higher digital fulfillment costs and an increase of supply-chain expenses remained a drag. The operating income margin remained flat. A decline in the gross margin offset the benefits from the lower SG&A rate.

Higher comps, a decline in interest expenses, and share repurchases drove the company’s fourth-quarter EPS, which beat analysts’ estimate.

Target expects to sustain the momentum in its comps in fiscal 2019. The expected improvement in Target’s comps and share repurchases will likely drive its earnings in 2019. However, the first-quarter margins will likely remain pressured, which reflects the negative mix and higher digital fulfillment costs.

Stock performance

So far, big-box retailers’ shares are on an uptrend this year. Target stock has risen 15.0% YTD (year-to-date) as of March 5. Costco (COST) and Walmart (WMT) stocks have risen 7.9% and 5.6% YTD. We think that the continued momentum in the comps will likely set the direction for these retail stocks.

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