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What Drove Target’s EPS in Q4?

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EPS beat the estimate

Target (TGT) posted better-than-expected fourth-quarter earnings. Target’s adjusted EPS of $1.53 beat analysts’ estimate of $1.52 and rose 12.5% on a YoY (year-over-year) basis. A sustained improvement in Target’s comps, lower interest expenses, and share repurchases drove the fourth-quarter EPS. However, higher digital fulfillment costs remained a drag.

Target’s gross margin contracted by 40 basis points to 25.7%, which reflected an increase in digital fulfillment and supply-chain costs. However, the operating margin remained flat. The pressure from lower gross margins was offset by a decline in the SG&A expense rate.

In comparison, Walmart (WMT) also posted a stronger-than-expected EPS in the fourth quarter. Improved comps and the lower effective tax rate drove Walmart’s bottom line. Costco’s bottom line is expected to mark strong growth due to industry-leading comps.

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Outlook

Target’s bottom line will likely sustain the momentum in fiscal 2019. Higher comps and share repurchases are expected to drive the company’s bottom line. Management expects its first-quarter EPS to be $1.32–$1.52. In fiscal 2019, the EPS is projected to be $5.75–$6.05. The estimate reflects 7%–12% YoY growth.

In the first quarter, Target’s gross margin is expected to remain weak, which reflects the unfavorable mix and increased digital fulfillment costs.

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