These Analysts Loved Target's Q3 Earnings, And Think The Retailer Will Win The Holiday Wars

Target Corporation TGT soared 14% after reporting third-quarter beats on Wednesday.

Sales and margin upside drove bottom-line outperformance, and 4.5% comps confirmed traffic strength, apparel strength and market share gains in major categories. Inventories fell 8% year over year, and store comps of 2.8% revealed no cannibalization from digital growth.

Analysts had little to complain about.

“This quarter will likely force many investors to re-evaluate their longer-term view of the Target story, which we believe positions the company well for further valuation multiple< expansion as well as more aggressive earnings growth forecasts,” Raymond James analyst Matthew McClintock wrote in a note.

First Impressions Of Target's Q3 Earnings

Analysts focused largely on Target’s strong apparel performance. “This was even more noteworthy given the unseasonably warm weather in September,” KeyBanc's Edward Yruma wrote in a report.

Raymond James noted that no apparel retailers except Lululemon Athletica Inc LULU report double digit comps like Target did. The analyst expects to see growth continue across categories.

“As seen in apparel, we expect share gains in key categories to accelerate as the retailer rolls-out new private-label brands and national brands seek out Target as a channel of distribution that is experiencing positive traffic,” McClintock wrote.

KeyBanc will watch home sales, in particular: “Home performance remains solid and we think that TGT could increasingly be a beneficiary of store consolidation within home furnishings."

Beyond strength in specific categories, analysts celebrated Target’s traffic growth.

“Traffic gains of 3%+ (particularly on compares of 5%+) are exceptionally rare across the entire retail industry and are even more impressive given the company’s size,” McClintock wrote.

Gross margins were the “biggest positive surprise” for Morgan Stanley, which attributed the beat to a more favorable mix shift, fewer promotions and increasing adoption of same-day store fulfillment. The factors are expected to persist in the near term.

“The dual pillars of TGT's value proposition, merchandising and fulfillment, are gaining momentum,” analyst Simeon Gutman wrote.

Target's Trend Expectations

Bank of America expects any near-term risk in mix shift to be offset by store and merchandising strategies, an expansion of profitable “same-day fulfillment” products, and the lapping of reporting periods stunted by inventory and supply chain headwinds.

KeyBanc forecasts market share gains as traditional competitors lag in digital investment.

“Target is winning in e-commerce because of its focus on the store,” Yruma said, citing 31% digital comps growth driven by same-day options. “... We think that the focus on pickup has been a key differentiator.”

Tigress Financial anticipates rapid growth in the Target Circle loyalty program to drive profits.

Holiday Performance For Retail

These factors will run in Target’s favor throughout the short holiday shopping season.

“We believe the best predictor of holiday performance is 3Q; by this measure, TGT is one of the best-positioned in our coverage,” Yruma wrote. “... We believe that the shorter holiday selling season will be favorable for omnichannel retailers given shorter shipping windows.”

Peers concur. Bank of America expects new and exclusive product offerings, holiday promotions and growth in same-day fulfillment offerings to drive strong sales through the season.

“TGT’s cont’d execution of merchandising strategies (optimizing pricing, promos and assortment) and growing fulfillment and supply chain efficiency should offset pressure from higher promos, digital penetration, and sales mix of lower-margin electronics and toys and baby,” analyst Robert Ohmes wrote.

KeyBanc suspects Target will face fewer nontraditional toy competitors this holiday. Rivals flooded the market last year in an attempt to fill the Toys R Us void.

The Ratings

• Bank of America maintained a Buy rating and raised its price target from $125 to $150.
• KeyBanc maintained an Overweight rating and raised its price target from $130 to $140.
• Morgan Stanley maintained an Equal-Weight rating and raised its price target from $107 to $130.
• Raymond James maintained a Strong Buy rating and raised its price target from $130 to $150.
• Tigress continues to recommend purchase and advises investors to “ be an aggressive buyer on any pullbacks below $109 a share.”

target's stock traded around $127.26 per share at time of publication.

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