Why BMO Is Buying Target And Raising Estimates After Earnings

BMO Capital Markets analyst Wayne Hood expressed optimism regarding Target Corporation TGT witnessing continued growth in traffic, after the company reported better-than-expected 2Q15 figures.

Hood maintained a Neutral rating on Target, while raising the price target from $85 to $87. The company reported its 2Q adjusted EPS at $1.22, beating the BMO estimate of $1.09, consensus of $1.11 and guidance of $1.04-$1.14.

Although Target’s comp store sales growth came in at 2.4 percent, in-line with expectations, the EPS beat was driven by better-than-expected expense management and gross margin expansion.

Target raised its 2015 EPS guidance by $0.10 to $4.60-$4.75 and projected its 3Q15 EPS at $0.79-$0.89, on 1-2 percent comp-store sales, GM rate expansion of 20-30 bps, flat SG&A rate, and EBIT margin expansion of 20-30 bps.

The EPS estimates for 2015 and 2016 have been raised to $4.76 and $5.13, respectively. Hood enumerated the reasons for the upward revision as:

1. The 2Q15 EPS beat
2. Robust growth in signature categories - Style, Baby, Kids and Wellness, which was “having a favorable impact on sales as well as on merchandise mix, giving us added confidence for GM rate improvement”
3. Potential to recover “a portion of last year’s GM rate pressure of 60 bps on aggressive promotions used to drive traffic”
4. Continued improvement in sequential and stacked transaction growth, boosting confidence in the company being able to grow comp-store sales 2 percent in 2H15 as sales comparisons stiffen
5. Encouraging early back-to-school and college sales