Target Earnings Hit the Mark
Target (NYSE: TGT) really hit the mark this morning with earnings, and shareholders are rewarding the company accordingly.
The Minneapolis, MN-based retailer reported earnings of 87 cents per share on $16.40 billion in revenues. This blew away Wall Street estimates. Analysts were looking for earnings of 74 cents per share on $16.27 billion in revenues. In addition, Target guided fourth quarter earnings of $1.43-$1.53 per share, versus estimates of $1.48 per share.
The strong earnings beat and solid guidance are part of the reason shares are jumping this morning, up more than 3% as of the time of this article.
“We're very pleased with our third quarter financial results, which reflect strong performance in our U.S. Retail and U.S. Credit Card segments,” said Gregg Steinhafel, chairman, president, and chief executive officer of Target Corporation. “We're confident that we have the right strategy and team in place to drive continued strong performance this holiday season and well into the future, allowing us to continue rewarding our shareholders while investing millions of dollars each week to support the many local communities where our guests and team members live, work and shop.”
A major driver of the improved earnings was the overall improvement in the credit card portfolio. As credit trends continue to improve for Target, as well as the economy in general, this should help drive earnings power. The company is still in line to sell its credit card unit, but there could be a rethinking of that strategy, as profits rose 10% to $143 million.
Target has also done an excellent job of expanding into groceries to help gain market share, and has been able to get enough customers to generate a rise of 4.3% in same-store-sales during the third quarter. This provided the largest increase the company has seen since 2007. Although gross margins continued to fall thanks in large part to the grocery initiative, costs fell even further to offset the decline in margins. This allowed the decline in expenses to flow right through to the bottom line. Gross margins in the third quarter were 30.5%.
The fourth quarter is traditionally the busiest time for retailers, and where they generate the majority of their revenues, and Target is no exception. It is being incredibly competitive with its Black Friday sales, opening stores on Thanksgiving at midnight to compete with Wal-Mart (NYSE: WMT), Best Buy (NYSE: BBY), and other major big box retailers.
With expenses falling faster than margins and the company trading at less than 2012 expected earnings, and a 2.3% dividend yield, Target has been able to finally get the mix right to go after Wal-Mart for the "cheap chic" customer it once had before the recession started.
This quarter certainly proved that management is well on its way to this initiative. That seems to be "hitting the mark" with shareholders.
Traders who believe that Target will continue to gain traction in sales might want to consider the following trades:
- Target is trading below its historic valuations, and it could see some multiple expansion and favorable analyst comments after this report. Consider looking at this name.
- Also consider shorting Wal-Mart if you believe that Target is taking market share away from Wal-Mart. Go long Target, short Wal-Mart in a pairs trade.
Traders who believe that the economy will get worse may consider alternate positions:
- Dollar stores have been picking up market share against Wal-Mart, and the same could eventually happen to Target. Consider names like Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG).
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.