Target (TGT) Falls Despite Q3 Earnings Beat: Here's Why

Target Corporation (NYSE:TGT) continued with its upbeat performance in fiscal 2017 as reflected from its better-than-expected third-quarter results. The company’s strategic endeavors, turnaround plan as well as improved traffic trends remain the driving factors. These helped this Zacks Rank #3 (Hold) stock to gain 10.1% in the past six months compared with the industry’s growth of 3.1%.

Despite reporting positive earnings surprise during the quarter, shares of this Minneapolis-based company are down roughly 4% in the pre-market trading hours. This is because the year-over-year decline in the bottom line and management’s commentary about highly competitive environment in the fourth quarter was not well perceived by investors. Further, the company’s not so encouraging outlook for the final quarter also hurt investors' sentiments.

Let’s Unveil the Picture

The company posted third-quarter adjusted earnings of 91 cents a share that outpaced the Zacks Consensus Estimate of 86 cents but declined 13.1% from the prior-year period. We observed that rise in cost of sales, increased SG&A expenses and higher interest expense hurt the bottom line.

The company generated total sales of $16,667 million that also surpassed the Zacks Consensus Estimate of $16,613 million and rose 1.4% from the year-ago quarter.

Target’s initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores and cost reduction are encouraging. In a bid to stimulate its digital sales this holiday season, Target is also strengthening its relationship with Google (NASDAQ:GOOGL) by allowing customers nationwide to shop through Google Express including voice-activated shopping.

The company also rolled out Target Restock program that allows customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge. These endeavors are important due to changing retail landscape that encompasses increasing online penetration and aggressive pricing that may hurt sales and margins.

Notably, comparable sales for the quarter increased 0.9% compared to a 0.2% decline witnessed in the year-ago period. While the number of transactions rose 1.4%, the average transaction amount declined 0.5%. Comparable digital channel sales surged 24% and added 0.8 percentage points to comparable sales.

Gross profit grew 1% to $4,955 million while gross margin contracted 10 basis points to 29.7%. Operating income plummeted 17.8% to $869 million, while operating margin shriveled 120 basis points to 5.2%.

Target’s debit and credit card penetration remained flat at 12.9% and 11.4%, respectively. Total REDcard penetration climbed to 24.2% from 24.3% in the year-ago quarter.

Target Corporation Price, Consensus and EPS Surprise

Target Corporation Price, Consensus and EPS Surprise | Target Corporation Quote

Other Financial Details

During the quarter, Target repurchased shares worth $171 million and paid dividends of $339 million. The company still had about $4 billion remaining under its $5 billion share buyback program.

The company ended the quarter with cash and cash equivalents of $2,725 million, long-term debt and other borrowings of $11,277 million and shareholders’ investment of $11,137 million.

A Glance at the Outlook

Management now anticipates fourth-quarter comparable sales to be flat to up 2%. The company expects fiscal 2017 comparable sales to be flat to up 1%.

Target now envisions fourth-quarter earnings in the band of $1.05-$1.25 and fiscal 2017 earnings between $4.40 and $4.60 up from $4.34 and $4.54 per share, projected earlier. The current Zacks Consensus Estimate for the fourth quarter and fiscal 2017 stands at $1.27 and $4.53, respectively.

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