Retail giant, Target (TGT 71.32, -5.83, -7.56%), is trading lower after reporting Q3 (Oct) earnings/guidance
this morning. Non-GAAP EPS came in at $1.09, which was up 20% from a year ago,
was within prior guidance of $1.00-1.20. However, that $1.09 result was
slightly below market expectations. Revenue rose 5.7% yr/yr to $17.59 bln,
which was below market expectations. In terms of full year guidance, TGT
reaffirmed prior guidance of non-GAAP EPS of $5.30-5.50.
Turning to the key metrics, OctQ same store comps increased +5.1%, which was down a bit from +6.5% comps in JulQ but in-line with prior guidance of ~ +4.8%. Comps were driven by healthy increases in both stores and digital channels. Boosting its online sales has been a key initiative for Target and they did well on that front as Q3 digital comps rose 49%, contributing 1.9 percentage points to total comp sales. This is the strongest digital comp Target has ever reported.
Comps are being driven by strong traffic and sales growth. A big part of the recent improvement in comps is from Target's store remodeling program. The company is currently undergoing wall-to-wall remodels of ~ 1,000 stores over a three year period. Target has also increased its ability to allow stores to fulfill online orders and offerings include Restock (similar to Amazon Prime Pantry), Drive-Up, and Shipt (same day delivery). In addition to these larger changes, Target has been increasing its portfolio of exclusive brands.
On the call, Target said it “continues to benefit from a very healthy consumer and macroeconomic backdrop.” As other retailers continue to close stores and liquidate in the face of rapid changes in consumer preferences and shopping behaviors, Target's investments have captured sales and market share by serving consumers who are no longer shopping at competitors with different strategies.
However, margins declined in OctQ as operating margin dipped to 4.6% from 5.0% last year. Gross margin declined to 28.7% from 29.6% last year. This decline was mostly due to higher supply chain costs driven by growth in digital fulfillment costs and other expenses related to the size and timing of holiday-related inventory receipts.
In sum, the stock is taking quite a fall today as investors are focusing on that revenue shortfall and the margin compression. The timing of this is not great as it makes investors nervous about the upcoming all-important holiday season. The revenue shortfall is a bit of a concern, but comps were still quite good.
Much of the margin decline sounds like it was from TGT increasing their inventory ahead of what will be a long holiday season. Investors need to be aware that this holiday season will have the maximum number of days between Thanksgiving and Christmas that can occur on the calendar. Nov 22 is as early as Thanksgiving can be, creating more holiday shopping days so building up inventory makes a lot of sense.
From a broader perspective, a bunch of retailers are reporting OctQ results today and a lot of them are trading lower: TGT -12%, KSS -9.7%, LB -7.7%, LOW -6.1%, BBY -0.8%. This overall bearish retail picture is probably weighing on TGT, in addition to its own earnings results. These retail results are a cause for concern about consumer spending this holiday season.
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