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Target: Margins Will Be In Focus Tuesday

Mar. 02, 2020 12:22 PM ETTarget Corporation (TGT) Stock1 Comment
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  • TGT reports earnings Tuesday.
  • TGT's historical sales trajectory could be off due to disappointing holiday sales.
  • The company has been growing revenue and expanding margins. Gross margin could be a key area of focus.
  • I rate TGT a hold due to headwinds to the economy and broader markets from the coronavirus.
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Source: TargetSource: Target

Target (NYSE:TGT) reports quarterly earnings Tuesday. Analysts expect revenue of $23.5 billion and EPS of $1.65. The revenue estimate implies about 3% growth Y/Y. Investors should focus on the following key items.

Customers Are Flocking To Target

Traditional retailers have been getting hammered as of late. Last earnings season several was defined by stagnant sales growth, shrinking margins or both. Target bucked the trend with sales of $18.7 billion, up 5% Y/Y. The performance was stellar. Given Target's size, it was difficult to grow revenue in the mid-single-digit percentage range. The performance stood out relative to competitors. Retailers like J. C. Penney (JCP), Abercrombie & Fitch (ANF), and Kohl's (KSS) reported flat to declining revenue growth last quarter. It may have implied that Target's revenue growth came at the expense of these retailers.

The company delivered comparable sales growth of 4.5%. Retailers have found it difficult to grow comparable sales as more sales have shifted to online. Macy's (M), J. C. Penney, and Bed Bath & Beyond (BBBY) are culling underperforming stores to become more efficient. Based on the sales channel, Target's store channel generated comparable sales of 2.8%, and digital delivered 1.7%. Target proved it can reach customers via several different sales channels. The company now ranks in the top 10 of all U.S. e-commerce companies.

Its digital growth was spurred by same-day in-store Pick Up, Drive Up, Shipt and same-day fulfillment options. Target has been expanding these amenities for years, creating more ease of use for customers. I understand that, since these options leverage Target's fulfillment centers, they are more profitable than traditional e-commerce fulfillment. Traffic was the primary driver of growth, another side benefit.

The retail environment has been characterized by heavy discounting in order to drive traffic. Target has been able to drive traffic without

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

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TGT upside could be capped by the coronavirus.

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Comments (1)

Management already stated holiday sales were lower than expected but higher margins sales exceeded expectations and the EPS guidance for quarterly earnings would be met.

The supply chain interruptions will be the focus. There are three Target super stores on my commute and business is good. I added more TGT to my position today because I'm averaging down.
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