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Why Target’s Bottom Line Could Continue to Grow at a Solid Pace

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Target’s EPS grew at a double-digit rate

Target’s (TGT) bottom line has grown at a double-digit rate in the past five quarters, which is encouraging given the considerable amount of pressure on profit margins. Strong underlying sales, cost savings, share repurchases, and a lower effective tax rate drove the company’s bottom line, which increased at an average rate of 16% in the past five quarters. Moreover, Target surpassed analysts’ estimate in the past two quarters.

Besides Target, Walmart (WMT), and Costco (COST) also impressed investors with their bottom-line performance in the past several quarters. Walmart exceeded Wall Street’s estimates in the past five quarters. Meanwhile, Costco’s EPS has grown at more than a 19% rate in the past nine quarters.

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Outlook

We expect Target to continue to grow its bottom line at a healthy rate in the coming quarters. However, the EPS growth rate could slow down a bit given the tough YoY comparisons. We expect continued comps growth, a favorable product mix, and cost savings to support Target’s bottom line in the coming quarters. Moreover, share buybacks are expected to cushion the earnings further. However, tough comparisons and higher digital fulfillment costs could adversely impact the EPS growth rate.

Management projects its second-quarter earnings to be in the range of $1.52 to $1.72. Meanwhile, analysts expect Target’s second-quarter earnings to increase by 10%. As for the full year, Target expects to post adjusted EPS in the range of $5.75–$6.05, which implies YoY growth of 7%–12%.

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