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Target Sprinkles Holiday Cheer on Investors

By Demitri Kalogeropoulos - Jan 15, 2018 at 4:47PM

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The holiday shopping season wasn't nearly as bad as management had predicted back in November.

Target (TGT -0.94%) had a surprisingly jolly Christmas. After warning investors in mid-November to expect a flat, or nearly flat, fourth quarter due to a brutally competitive holiday period, its latest business update revealed a far stronger result.

Comparable-store sales rose 3.4% during November and December to mark a healthy acceleration over the prior quarter's 0.9% increase. The retailer had been forecasting comps of between 0% and 2% over the holidays.

A Target employee helps a customer.

Image source: Target.

We don't yet have a full picture on how well its retailing rivals did, but that expansion pace is likely to put Target in healthy competition with its peers. Wal-Mart's (WMT 2.85%) most recent business update, also released in mid-November, projected holiday-quarter comps of between 1.5% and 2% for its U.S. stores. Kroger is targeting just above 1% comps for the quarter, too.

At the top of the broader industry, meanwhile, is Costco (COST 3.13%), whose post-holiday update showed a sharp sales jump as comps rose 7% in the holiday period, up from 5.8% in its fiscal fourth quarter.

There were a few encouraging wins in Target's fourth quarter, including accelerating customer traffic. That core metric rose 1.4% in the prior quarter, and the recent update implies a solid improvement from there. Target's holiday growth was broad-based, spanning essentials like groceries along with its higher-margin categories of home goods and apparel. The digital sales channel was again a key standout, with revenue rising 25% to push that segment further, to above 4% of the total business.

Room for cautious optimism

The holiday update wasn't all good news for shareholders. Target didn't release details on its profitability, for example, and the outlook there isn't particularly bright. Gross profit margin fell over the first nine months of the year as the retailer ramped up its price-cutting strategy. That trend combined with higher spending -- on things like the digital sales channel and store remodels -- to push bottom-line profitability down to 6.4% of sales from 7.4% a year ago. The faster growth rate should reverse a bit of that decline, but the overall weak earnings picture hasn't changed.

Two young women holding shopping bags.

Image source: Getty Images.

Meanwhile, Target's early prediction for 2018 isn't calling for a dramatic rebound. Instead, CEO Brian Cornell and his team expect minor comps gains and "stability" in annual earnings per share.

Adjusted profits should improve to as high as $5.45 per share from an expected $4.69 per share in 2017, mainly thanks to the benefit of a lower federal tax rate.

Looking ahead

One could argue this steady outlook is a case of management underpromising in hopes of overdelivering. But Target's weak longer-term results warrant plenty of caution. Comps dipped by 0.5% in 2016 and are now on track to rise by slightly more than 1% in 2017. That's a nice improvement, but it still smacks of a challenging sales environment. And the retailer had to trade off some of its hard-won profitability to achieve that modest result.

Target aims to build on its positive momentum with a push into same-day delivery in 2018, in addition to an upgrade to its store remodeling program and improvements on its digital shopping app and website. These initiatives will reduce earnings growth in the short term, but the profit pinch should be worth it if they increase the ranks of loyal Target shoppers. Thus, the stock could be an attractive choice for investors seeking a stable retailing business that offers unusually strong dividend income.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$153.90 (-0.94%) $-1.46
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$122.60 (2.85%) $3.40
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$429.48 (3.13%) $13.05

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