Target Smashes Analyst Forecasts

| About: Target Corporation (TGT)

Summary

Target came in strong on earnings and revenue.

Sales still appear to be down from the prior year due to leaving the pharmacy business, but comparable sales were only down .2%.

No new ratings coming out, but I’ve called out the opportunity in Target at least 3 times in the last 3 months.

The old story is dying as investors and reporters stop focusing on politics and bathrooms and start looking at the company.

Target (NYSE:TGT) delivered a massive beat on earnings. For the third quarter, adjusted earnings per share came in at $1.04. Analysts' estimates were smashed by $0.21. The company delivered a beat on total revenue as well. Comparable sales were down .2%, but that is very close to the top end of guidance. Management guidance for sales came in at flat to down 2% prior to the monster quarter.

Strongest Areas

The strongest areas were in their signature categories which saw sales growth of around 3%. Sales through digital channels were up by 26%. The relatively strong performance in the third quarter should remind investors of one simple truth. People still shop at Target.

Prior Work

I've been quite bullish on Target in prior coverage. I called for investors to buy them in September when the share price went under $70 per share. I repeated that call in October when the share price was around $68 per share. Then I delivered the call on Target once more on November 4th when shares were trading under $67.

Management's Guidance

Management lifted guidance for the year from a range of $4.80 to $5.20. The new guidance is a range of $5.10 to $5.30. That is a fairly substantial increase.

Revenues

Total revenues will still appear to be down substantially for investors using simple screening devices. That is the result of Target exiting the pharmacy portion of their business. The pharmacy portion was contributing nothing to earnings, but it was inflating total sales. Consequently, sales figures for Target were higher across the company, but the additional sales weren't doing anything to provide value to shareholders.

Great Performance, but Higher Prices Weaken Buybacks

The results are a bit of a mixed bag for investors. Stronger performance on comparable sales is always welcome. Even at negative .2%, it is difficult for bears to argue that the company is collapsing. However, the higher share price will make it more difficult for the company to rapidly retire shares.

Back to School is Back to Target

Shoppers were coming in for back-to-school sales and the traffic from those events lifted Target to stronger performance. I expect them to do reasonably well with Christmas shopping as well.

Death to the Old Story

When the Wall Street Journal (subscription required) covered the earnings, there were two words absent from the article. These are two words investors have heard far too often. They are "bathroom" and "politics". Target is a retailer and they've done well selling products. They also did well paying dividends and buying back shares which represents an excellent use of their capital.

No New Rating

My stance has been widely known. Target is a material portion of my portfolio at around 4% or so. The company has done well in providing both income and capital appreciation. Since many analysts seem to simply upgrade whatever has been moving higher, there might be some favorable ratings coming out soon. I won't get into that game. I reminded investors about the value of Target when it seemed no one else liked the chain. Why would I want to reiterate the ratings now? If Target's climb continues, I may need to drop to a neutral stance. I don't anticipate closing out my positions any time soon, but if the price went high enough, I could find myself in that situation.

Conclusion

Excellent performance by Target sent shares soaring higher as investors seemed to suddenly remember that customers still shop there. The old story is starting to die down and the new story is growing. This is a retailer with economies of scale and growth in both their signature categories and their online presence.

Disclosure: I am/we are long TGT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. Tipranks: Assign no ratings. I'm happy with the existing track record and don't wish to make any changes.