Target Earnings Report- Not So Much About Earnings But About Consumer Behavior

Target Corporation TGT shares started 2019 with a value around $66 and finished the year with a share price around $128, almost passing the bar of $130 around Christmas. This investors' fate in Target was based on good results in sales and profitability segment. The reason for these great results and strong customer traffic growth, the company's fastest in the last decade, was widely accepted and preferred same-day delivery. This ultra-fast service also boosted the margins. Consequently, Target managed to outpace fourth-quarter earnings expectations, but revenue fell short because of weak sales of toys, electronics and home goods over the holidays. As a result, shares were trading down nearly 3% at midday.

The Backdrop – Growth Slowdown In Holiday Quarter

Such a strong growth, as seen in 2019, was not continued in the holiday quarter. This growth slowdown, which is also seen in the upcoming earnings results, was not welcomed by the investors. Prior to the release, Target already announced that store sales growth has slowed down to approximately 1.4%, which is less than half of growth the company managed to achieve in 2019. Biggest slowdowns relate to seasonal product groups like video games and toys. Interestingly, similar news was heard from Walmart Inc WMT, which also suffered from a growth slowdown.

Mixed Quarter Results For The Period Ended Feb 1

In the fourth quarter, net income grew from $799 million to $834 million, or $1.63 per share from  $1.52 per share, a year earlier. Excluding items, Target earned $1.69 per share, which topped analyst estimates of $1.65 per share. Revenues managed to get a boost from $22.98 billion last year to $23.40 billion, but this is below Wall Street estimates of  $23.50 billion.

Sales at stores which are open at least a year rose in line with expectations, 1.5%  to be exact. This adds up to 11 consecutive quarters of growth at Target stores which have been opened for at least a year. The discount retailer has invested in its stores and made significant efforts to expand its e-commerce business.

But it is the same-day services that drove the fiscal fourth quarter results: more precisely, same-day pickup in store and by drive-up, along same-day delivery of packages through Shipt. Altogether, these services made as much as ⅘  of its overall digital sales growth during the period. It can be said Target is following Amazon.com, Inc.'s AMZN footsteps as same-day results seem to be key for wooing customers. Last but not least, the company leaders said the coronavirus has not had a large impact on its business or its guidance. So, despite some results being weaker than expected, there's no storm on the horizon.

Outlook

Although weak holiday sales are surely a valid reason for concern, the question that comes to investors' minds is: what's next for the stock? Maybe even more important than earnings results, estimates, and expectations from Target as well as other retailers is to figure out what to expect from U.S. consumers in the following period.

After all, they are the ones who decided not to buy toys and video games as much as they used to. And figuring out consumer behaviour is the crucial factor that will ultimately decide whether the growth slowdown will continue or not. And surely, all investors are keen on finding out whether the latest quarter growth decline was just a one-time glitch or a prologue of what is yet to come…

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