Target (TGT 0.18%) reported very strong third-quarter earnings results that underscore its ability to operate within a shifting retail environment. With solid same-store sales, robust online growth, and a continued emphasis on improving its deliveries, it's hard to find a better name within the sector.
The strong quarter also displays the ongoing strength of the consumer across the economy. It sets the stage for a potentially awesome holiday season.
Q3 results
Easily the biggest success here was sales growth. With 4.5% comparable sales growth, Target is maintaining its positive story.
- Comparable sales grew 4.5%, with the growth achieved through both traditional and digital means. Comp-store sales represented 2.8% of that growth, while digital sales made up 1.7%.
- On its own, the digital channel had comparable sales growth of 31%. The bulk of this area of the business is revolving around the Order Pickup, Drive Up, and Shipt initiatives. Indeed, many of the traditional brick-and-mortar names are taking advantage of their store infrastructure to capitalize on the increasingly popular option to order goods online and pick them up at the store.
- Indicators imply that sales growth is stemming from more shoppers, rather than higher pricing or ticket size. Comparable traffic grew 3.1% in the third quarter. The earnings release noted that this growth was attributable to both physical stores and the digital side.
All of this is fantastic. The growth rates were exceptional. Of course, one could point out that growth decelerated compared to last year. Comp sales grew 5.1% at the same time last year compared to the 4.5% achieved this year, and digital sales grew 49% last year versus the 31% growth reported this year.
Of course, none of the strong sales growth means much if the business can't derive a valuable bottom line from it.
- Third-quarter operating income had a strong 22.3% increase year over year.
- Earnings per share grew 18.2% under generally accepted accounting principles (GAAP) to $1.37. On an adjusted basis, earnings were up 24.9% to $1.36 per share.
Image source: Getty Images.
New guidance
Thanks to its strong Q3 performance, Target upped its expectations for the year. The retailer now anticipates full-year earnings per share (EPS) of $6.27 to $6.47 on a GAAP basis, and $6.25 to $6.45 on an adjusted basis. The new range is a good improvement on previous guidance of $5.90 to $6.20 per share.
Going off of the conservative end of that range, Target shares are currently trading at a little over 21 times forward full-year earnings. Compared to the ever-popular Amazon.com's forward P/E of 53, I like the valuation that Target shares are offering relative to the growth they're creating. It offers exposure to good retail growth, without a big premium.
Target has a good spot within the market
Much in the same vein as how Amazon draws in customers by offering a broad range of products and services, the traditional brick-and-mortar names that are succeeding seem to be the ones that offer a conveniently diverse lineup. Clothing retailers like Macy's continue to stagnate because they aren't a one-stop shop for all consumer needs. Target has the advantage of offering a wide range of products, drawing in customers by making it possible for them to get a lot of their shopping done at one location.
With same-day services representing 80% of Target's online business, it was very encouraging to read CEO Brian Cornell's remarks that the costs of online orders decrease "by 90%" when consumers use same-day options. He noted that the advantage comes into play when Target is able to fulfill orders from its stores, rather than having to move goods from its distribution centers.
I've long believed that shipping would become a stumbling block for e-commerce. Shipping and distribution are not cheap, nor are they simple. The ability of brick-and-mortar stores to leverage their networks to fulfill online orders creates a great advantage in this regard; Target's success here confirms this premise.
Going strong into the holidays
Looking to the holiday season, Target seems to have the momentum. Total revenue is up 4.5% through the first nine months of the year. Operating income is up 15.6% through that same period, and EPS is up 18.7%. If I were putting my money into a smart retail name for the fourth quarter, I'd look to Target.
