Target (TGT -0.36%) stock has recently slumped below the broader market after having twice in 2019 jumped far above the S&P 500. That inconsistent return picture reflects some doubt on the part of investors that the retailer can sustain the positive growth momentum it won last year as it set a modern record for customer traffic gains.
Bigger questions also include whether Target can finally stabilize its profits in 2019. Following years of declining operating margins as management pivoted to a multichannel selling strategy, the chain has predicted an end to that brutal streak this year.
But Target's outlook calling for market share gains across its physical and online selling channels, plus rising profit margins, might be too hard to achieve. Investors will get important clues as to whether that 2019 prediction is too aggressive when the retailer reports earnings on Wednesday, May 22.
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1. Is momentum holding up?
Of course, Wall Street won't ignore the critical growth metric of comparable-store sales. Revenue gains clocked along at a market-thumping 5% through the holiday-season quarter and for most of 2018. Target's latest earnings report showed that this growth came from a balance of rising customer traffic and increased e-commerce demand. Together, these positive trends produced a rate of growth the retailer hasn't seen in a decade. Walmart sounded a similar tone in reporting that 2018 constituted its best expansion rate in nine years. The retailing giant just affirmed that this strong momentum carried into the new fiscal year.
Given those positive statements, any sharp slowdown in either of Target's two sales channels would be cause for investor concern. The retailer will need contributions from both the online and physical shopping divisions if it's going to log a second straight year of robust growth following negative comps in 2016 and an anemic 1% boost in the following year.
2. Where will profitability land?
The bigger questions surround profitability and where that figure might land in 2019. Target's operating margin has been declining since it shifted pricing strategies and decided to pour resources toward the omnichannel selling posture. Its operating income dove 13% in 2017 and fell a further 3% in 2018. But management sees a brighter future ahead for this bedrock profitability metric.
Specifically, CEO Brian Cornell and his team noted in early March that after accounting for extra selling time in the previous year, operating profit rose nearly 6% in 2018. That improvement "will serve as a good benchmark for the years to come," CFO Cathy Smith predicted.
If that's true, then Target shareholders should expect to see the company's first increase in core profits in four years in 2019. Walmart's recent earnings report suggests that such a rebound isn't out of reach.
3. Is the outlook too optimistic?
Target's earnings goal relies on some aggressive assumptions that may change this week to reflect a tough competitive environment or slowing economic growth. Specifically, Cornell and his team believe they'll gain market share online and in stores in 2019. The retailer is also predicting it will beat rivals across each of the chain's major merchandising categories.
This impressive growth would deliver comp gains of somewhere between 3% and 5%, landing sales gains just shy of last year's healthy result. In the context of rising profitability, reaching those goals would give investors plenty of reasons to feel optimistic about Target's long-term outlook even as more consumer spending shifts to online channels.
