Some of its biggest peers have already reported fourth-quarter earnings, but now it's Target's (TGT -0.05%) turn in the spotlight. The retailer announces its holiday season operating results in just a few days, and investors have high expectations.
While the chain is sure to announce strong sales metrics during an unusually strong period for the industry, the stock's continued rally into 2021 will depend on management's profitability and earnings forecasts.
Let's take a closer look at the report slated for Tuesday, March 2.
Image source: Getty Images.
Customer traffic
We already know that Target had a good season. In mid-January it revealed that sales grew 17% during the holidays to mark just a slight slowdown from the third quarter's blistering 21% spike. That will be enough to outpace Walmart (WMT 0.18%), which just reported a 9% holiday quarter boost.
We'll learn on Tuesday whether Target continued to win market share in each of its core selling categories. Through the first nine months of the year the chain added over $6 billion to this haul as customers embraced its multichannel retailing model. This week's report should show more progress on this score. Look for Target to pair surging average spending with a modest boost in customer traffic. Walmart, in contrast, got all of its growth from higher spending as transaction numbers declined.
Rising margins
The biggest factor behind Target's 2020 stock price rally was improving margins. While the competitive holiday season usually pressures this figure, that's not as big a risk this year.
TGT Operating Margin (TTM) data by YCharts
After all, shoppers have been happily paying full price on most products while tilting their spending toward premium merchandise and faster fulfillment options. These factors helped Target's gross margin rise last quarter and helped lift operating margin by 3 percentage points to 8.5% of sales. Investors are bracing for more of the same this quarter, with earnings jumping to $2.51 per share compared to $1.69 per share a year ago.
A fresh outlook
Target tends to wait until midyear to announce its annual dividend increase, so we're not likely to get an update on that score. The boost should easily outpace the 2% uptick that Walmart just announced, though.
Yet Target might follow its bigger rival in predicting surging costs in 2021 as it works to protect its bigger sales footprint while strengthening the online selling platform. Walmart said it needed to stay aggressive by dramatically increasing spending.
The good news is that Target's rising margins might convince management to forecast another year of strong earnings growth despite those rising expenses. Walmart, on the other hand, warned that profits will be close to flat this year.
The end of the pandemic will pressure a few of its merchandise categories, especially later in the year. But CEO Brian Cornell and his team are likely to please investors by issuing a bullish 2021 forecast that includes market share growth, robust earnings, and rising cash returns to shareholders. Those are all good reasons to keep holding this stock, which pairs strong profitability with one of the industry's longest dividend growth streaks.
