Target Earnings: What’s in Store for Q3?

Target (TGT) will announce its third-quarter earnings before the markets open on Wednesday. Analysts expect the company to sustain the growth momentum in the third quarter. However, the pace of Target’s earnings growth will likely show sequential deceleration.

Analysts’ expectations for Target’s earnings

Analysts expect Target to post revenues of $18.49 billion, which reflects YoY (year-over-year) growth of 3.8%. Management expects comparable sales to increase 3.4% in the third quarter, which will likely drive Target’s top-line growth.

Meanwhile, analysts expect Target to post an adjusted EPS of $1.19 in the third quarter, which reflects YoY growth of about 9%. The projection shows a deceleration in the EPS growth rate on a sequential basis. In the second quarter, Target’s bottom line rose by about 24%.

What could drive Target’s sales in Q3

We expect Target’s top line to continue to gain from strong growth in comparable sales. Notably, Target’s comps have been growing at a stellar rate due to the expansion of same-day delivery services.

The company’s rapid expansion of same-day fulfillment options, including Shipt, in-store pickup, and Drive Up, will likely to boost digital sales and comparable sales. Digital sales contribute meaningfully to Target’s comparable sales growth. During the last quarter, digital sales added 1.8 percentage points to Target’s 3.4% comps growth. We expect the company’s growth trend to continue in the third quarter.

Besides digital expansion, store remodeling, compelling assortments, and competitive pricing could continue to drive the company’s in-store comps.

Similar to Target, expanded digital fulfillment options continue to drive Walmart’s (WMT) digital sales and comps. Walmart’s digital sales accelerated during the third quarter due to digital expansion. Digital sales added 1.7 percentage points to its comps growth in the US, which increased  3.2%.

What could support Target’s earnings?

We think that a favorable mix and cost-savings will likely support Target’s margins and EPS.

Higher adoption of same-day delivery services will likely reduce the company’s fulfillment costs, which should support the margins. Besides margin expansion, share repurchases might cushion its earnings more.

However, tough YoY comparisons could limit the earnings growth rate in the third quarter. Last year, Target’s bottom line rose more than 21% in the third quarter.

Stock beating broader markets by a wide margin

Target stock has risen about 69% on a YTD (year-to-date) basis as of Monday. The company’s robust financial performance drove its shares higher. The shares outperformed broader markets by a considerable margin. For instance, the S&P 500 has increased 24.5% during the same period.

Walmart and Costco (COST) stocks have risen 29.1% and 49.5%, respectively, YTD. However, Kroger (KR) stock has fallen about 2% this year.

What’s the upside in Target stock?

Analysts have an average target price of $115.90 on Target stock, which implies an upside of 3.5% based on its closing price of $111.96 on Monday.

We think that sustained momentum in the company’s revenues and EPS could continue to support the stock. Besides, Target’s low valuation compared to Walmart and Costco could drive its stock. However, the deceleration in the EPS growth rate and Amazon’s (AMZN) rapidly expanding delivery options could limit the upside in the stock.

Target stock trades at a forward PE ratio of 17.5x, which is well below Walmart and Costco’s forward multiples of 22.6x and 35.4x.

Among the 28 analysts tracking Target stock, 18 recommend a “buy” before the company’s third-quarter earnings. Meanwhile, ten analysts recommend a “hold.”