The over 60% stock price increase so far this year is one sure sign that investors are expecting good news from Target (TGT 0.18%) when it posts its third-quarter results and updates its predictions for the holiday shopping period ahead. That bar was raised even higher when peer Walmart (WMT -0.08%) recently announced strong operating metrics in its core U.S. segment.
The leading retailer's growth is coming from some of the same areas that Target has identified as critical to its success. However, there's no reason why both companies can't achieve market-beating growth to close out 2019. Let's take a look at what might constitute a positive earnings report from Target when it announces results on Wednesday, Nov. 20.
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Winning market share
Walmart's market share wins lately have been powered by two big factors: multichannel selling and fresh food. Target's growth has been even more pronounced and it owes its success to management's focus on premium products like apparel and home goods and ultrafast fulfillment offerings.
In fact, comparable-store sales are up 10% over the last two-year period compared to just over 6% for Walmart. Target executives have made no secret about the big driver behind the gains, either. It's same-day shipping and pickup options. Those quick fulfillment offerings powered most of the retailer's growth last quarter and should also drive results this week. Look for CEO Brian Cornell to highlight same-day services for supporting customer traffic and overall growth.
For context, Walmart reported last week that traffic rose by about 2% in the U.S. division. Target should outpace that result and should also get a bigger contribution from higher average spending to likely push comps a bit above Walmart's latest 3% uptick.
Turning threats into opportunities
Just two years ago, investors' major concern was that the shift to multichannel retailing would reduce Target's earnings power. Fast-forward to today, and it's looking increasingly likely that to have the opposite effect.
Customers are willing to pay for added convenience like instant gratification and investors can see that trend impacting Target's rising gross profit margin. "These services ... leverage existing store assets and our store teams in new ways," COO John Mulligan explained back in August. "As a result, our same-day options are the most profitable within our digital offering." Importantly, this profitability should increase as volumes keep ramping up. Most investors who follow the stock are expecting per-share earnings to rise to $1.19 from $1.09 a year ago.
A bright outlook
Walmart removed some of the uncertainty about the industry outlook last week by saying that "our consumers' economic health appears solid." Target will have a chance to offer its own reading on consumer strength this week that will reflect its slightly different shopper demographic.
Assuming no negative surprises in that outlook or in the chain's competitive position, Target should confirm or raise its full-year forecast. As of now, that prediction calls for comps to rise by about the same 3.5% result investors saw last quarter. Earnings are forecast to land between $5.90 and $6.20 per share, but that range could be narrowed to reflect the retailer's latest results.
Finally, look for Target to provide a rationale for the elevated capital spending that management is predicting will last at least through 2020. Those investments include store remodels and more spending on quick fulfillment, which so far have supported some of the fastest growth shareholders have seen in over a decade.
