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With a weak economy, investors can never be sure what retail investments are going to look like from quarter to quarter. But Target (NYSE: TGT ) investors have something to be thankful for, just in time for Thanksgiving.
It may be the fall, but these earnings are up
Last week, America's second-largest retailer posted a 15% uptick in earnings for this past quarter, compared with last year, while its total revenue increased 3.2%, to 16.93 billion. Sales at stores open at least a year rose 2.9%, which owed partly to higher product prices and customers buying more items per transaction.
Gross margins slipped slightly by 0.2 points to 30.3%, thanks in part to Target's stocking more fresh food products and offering 5% discounts for its REDcard customers. Sales from Target's debit and credit cards made up 14% of the quarterly sales, up from 9.5% year over year. Earnings were good enough to push the stock up 1% in same-day trading, and the stock is up about 17% from the same time last year.
That's good news for Target, but not so much for rival Wal-Mart (NYSE: WMT ) . The Arkansas-based company saw its stock decline 3.6% after posting its third-quarter results and has underperformed Target over the past month.
Shoppers are moving targets
This holiday season, U.S. retail sales are expected to increase by 4.1% over the last year, to $586.1 billion, according to the National Retail Federation. The average American shopper is expected to spend $749.51 on holiday-related gifts and decor, up from $740.57 last year. If all this is true -- and retailers are hoping for this and more -- Target may be looking at a solid next quarter as well. The company expects to earn $1.45 to $1.55 a share during the holiday season, with analysts forecasting $1.51 a share.
Bur the retail arena can be a competitive market during the holidays, and some retailers are falling behind. J.C. Penney's (NYSE: JCP ) branded in-store "shops" have been compared with similarly styled shops rolled out in Target, but with one huge difference -- sales. J.C. Penney reported a 26.1% drop in same-store sales year over year last quarter, and traffic at J.C. Penney stores is down 12%.
According to Shop.org, retail industry online sales are expected to jump 12% this year to $96 billion. Macy's (NYSE: M ) has invested heavily in its websites, Macys.com and Bloomingdales.com, and its online sales collectively rose more than 40% this past quarter. Target is also expecting solid online sales for the holidays. In a conference call, Target CEO Gregg Steinhafel said, "We will continue to invest in meaningful resources to ensure our stores [and] online and mobile platforms provide a seamless experience that allow our guests to engage with us, wherever and whenever they choose."
A look ahead
According to Seeking Alpha, Target is on track to bring in $100 billion in annual revenue by 2017. To hit that goal, the company needs to grow comparable same-store sales by 3% each year. If it can pull this off over the next five years, Target investors would earn more than $8 per share in 2017. As the company expands into Canada next year, Target will have to spend money to get those operations up and running, so investors will want to pay attention to resources going into new stores.
Overall, investing in Target at this moment doesn't look bad, but it doesn't look exciting. A struggling U.S. economy and expansion into Canada could slow down profits in the coming year. There's no reason to sell right now, but there's nothing that makes me want to buy, either.
This doesn't mean there aren't retail stocks prime for the picking, though. The retail space is in a time of transition like none other since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.