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Target Earnings: What to Watch

By Demitri Kalogeropoulos – Aug 18, 2019 at 9:18AM

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Investors are expecting an aggressive outlook from the retailer on Wednesday.

Target (TGT 0.60%) investors have had plenty of good news to celebrate in recent months. The chain's last two quarterly reports included some of its best growth metrics in years. Better yet, profitability has finally started rising following two years of declines. These trends suggest that the chain's multichannel selling strategy might deliver the robust sales and earnings gains that management has been promising, just as it has recently for peer Walmart (NYSE: WMT).

CEO Brian Cornell and his team predicted in late May that Target would gain market share across its retailing categories and in both the physical and digital selling channels. We'll find out whether that bullish forecast played out when the company announces second-quarter results on Wednesday, Aug. 21.

Let's take a closer look at key indicators.

A shopper checks her smartphone.

Image source: Getty Images.

Customer traffic

Target isn't alone in posting strong sales these days, with Walmart seeking record gains, too. But the retailer's focus in areas like premium home goods and apparel have helped keep it in a league of its own. Sales gains landed at 4.8% in the fiscal first quarter, compared with Walmart's 3.4% uptick.

The key difference has been customer traffic growth, and shareholders are expecting positive momentum here on Wednesday. That metric jumped 4.3% last quarter, meaning it accounted for almost all of the retailer's sales gains. Another quarter of robust gains would imply that Target's various initiatives, including store remodels and home delivery, are resonating with customers. "Guest traffic is the ultimate reward for our efforts," executives said back in May, and so investors will be right to focus on that figure this week.

Making money

Target has been telling investors that its shift into multichannel selling will eventually yield strong profitability, but it hasn't been until the last few quarters that executives have had solid data to support that contention. Operating margin was above 7% of sales before the retailer started shifting its strategy in 2016, and it fell to 5.5% in late 2018. But profitability rebounded to over 6% last quarter, despite rising supply-chain costs and higher wage expenses.

That success implies Target will notch another profit uptick this week. Still, there are major risks that threaten its earnings power, including aggressive competitive responses to its market share gains and rising prices from the U.S. trade war with China. Management has stayed optimistic in the face of these issues so far, but could shift its tune on Wednesday if selling conditions weakened.

Is an upgrade on the way?

Target's bullish outlook was hard to miss in its last earnings report. While retailers are typically reserved about their full-year forecasts until after the second quarter, the company in May predicted strong market share gains across its selling channels through 2019.

Target this week will have to back up that optimism with hard data. Specifically, executives aim to show that they can boost comparable-store sales at about the same mid-single-digit pace they achieved last year while notching their second consecutive year of improved operating margin. Hitting that 2019 outlook will depend on customers showing up through the crucial holiday shopping season. But a solid second quarter would put Target in an ideal position to capitalize on broader industry strength and its own successful growth initiatives.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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