Target (NYSE:TGT) is getting ready to report results of its holiday quarter. This is the company's chance, in my view, to shake off the broad equities February malaise that stopped the retailer's stock from climbing past my previous price target of $80/share.
In terms of expectations, the Street is betting on revenues of $22.5 billion for a YOY increase of nearly 9%, the best growth rate in years -- although benefited this time by an extra week in the fiscal quarter. Non-GAAP EPS consensus of $1.38, if achieved, would be a significant improvement of about 20 cents over the company's own original guidance provided last quarter, at the mid-point of the range.
Credit: WABC TV
On my end, I would be disappointed to see sales fall short of current estimates. Target came out with a solid read on the holiday season's results early in January, which included the months of November and December. The management team projected a total YOY top-line growth of "more than 9 percent in the fourth quarter", suggesting the Street is mildly skeptical of Target's revenue-generating abilities in 4Q17. But to me, the farther the retailer gets into the execution of its omnichannel, store remodeling and quick delivery plans, the lower the probability of top-line weakness becomes.
Luckily, in my view, the company has already gotten a head-start on current year guidance, setting it at "a low single-digit increase in its 2018 comparable sales and year-over-year stability in EPS generated by its core business, excluding the benefit of federal tax reform". Target's management team has had a recent history of being overly conservative on its outlook, which has caused the stock to tumble even following strong actual results. This week, the risk of a weaker-than-expected 2018 guidance is much lower than in previous periods, in my view.
On the profitability side, I don't expect to see much in terms of improvement. Target's turnaround in part relies on price competitiveness and increased opex to support increased sales activity and the more complex fulfillment network. However, I believe the 5% YOY decline in earnings to be already aggressive enough (if not overly so) to account for potential margin headwinds, considering (1) the extra week in the quarter, (2) the lower effective tax rate expected to apply to January and (3) the likely reduction in share count due to repurchases.
All taken into consideration, I believe the most likely outcome of Target's holiday quarter will be a minor revenue beat coupled with earnings per share that should top consensus more pronouncedly. On the outlook, I doubt that management will make downward revisions to its recently-issued guidance. However, I expect to hear more about the impact of federal tax reform on Target's net deferred tax liabilities, which should give us a better sense of where non-GAAP EPS might land in 2018.
Below is my revised longer term projection on Target's financials results through 2020.
Source: DM Martins Research, using historical data from company reports
Final words on the stock
I remain bullish on TGT, and believe this will be one the successful turnaround stories in the retail sector to play out over the next 12 months.
Unfortunately for those who have not already bought shares of the Minneapolis-based company, much of the share price upside that I predicted would take place through 2020 has materialized much more quickly than I originally expected. However, I still see solid return potential of about 11% per year on this stock over the next 24-30 months, which I find enticing (even if not exhilarating) given what I perceive to be the high quality of the business.
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