Surprisingly, 2018 has been good to Target (TGT -1.74%) shareholders. This time last year, the retailer was limping into a holiday season that management thought would show flat sales and falling profitability. Actual results turned out much better than expected, though, and that pleasant surprise started the ball rolling for what would become a sharp rally for the stock.
Target has impressive operating momentum heading into its final quarterly update of the year set for Tuesday, Nov. 20. Below, I'll highlight a few of the key metrics that will determine whether those trends are holding into the start of 2019.
Filling the aisles
Target entered 2018 predicting essentially flat sales, but its outlook has improved, just as it has for other major retailers, including Walmart (WMT -0.64%). However, Target's growth has been a step above that of its main rival lately. In fact, sales at existing locations are up just under 5% for the first half of the year, while Walmart's gains have been closer to 2%. The chain has even challenged Costco (NASDAQ: COST) in market share gains lately.
CEO Brian Cornell and his executive team predicted back in August that sales would rise by about the same 5% pace over the year's final two quarters, and we'll find out on Tuesday whether the company is on track to exceed, or at least meet, that goal. Keep a close eye on customer traffic trends, too, which will help investors judge whether last quarter's acceleration to 6.4% was a short-term fluke or part of a bigger trend.
The real test on Target's firming sales demand will be whether it allows the company to raise prices without sacrificing its broader growth plans. That hasn't happened yet this year, and in fact, the company has posted lower gross margins and higher selling expenses. Together, these trends pushed operating margin down to $2.17 billion, or 6.3% of sales, from $2.25 billion, or 6.8% of sales, a year ago.
That result has put Target a bit ahead of Walmart in terms of the level of profitability it is giving up as it invests in the digital sales channel and in keeping prices low. Thanks to inflation and trade skirmishes, though, costs are rising on many staple products. Thus, it will be interesting to see whether Target can balance its low-price strategy with its goals of protecting profits and expanding market share in this tough sales environment.
In late August the retailer forecast that sales would rise by about 5% in the key holiday selling period. Investors are likely to see an important update to that prediction on Tuesday that reflects the latest shopping and competitive trends.
It's possible that Target's current forecast is too conservative, since it assumed at the time that sales growth would continue at the same pace as in the first half of the year -- even though key metrics like customer traffic spiked higher in the spring months. Sure, those results were lifted by a seasonal shift from the first quarter into the second quarter due to an unusually cold April. However, another strong earnings report would confirm that Target is entering this holiday sales period with the strongest momentum it has had in over a decade.