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At first glance, Target's (TGT) upwardly revised Q4 comparable sales guidance, which now calls for growth of approximately 1.5% compared to its prior forecast of flat comps, looks quite bullish for the big box retailer. Indeed, there are some positive takeaways from the improved comp guidance, especially after TGT reported weak Q3 results in November that also included downside Q4 EPS guidance of $1.85-$2.45. However, it's the company's EPS outlook that's once again causing disappointment.

• In addition to raising its comp outlook, TGT merely reaffirmed its Q4 EPS guidance, which is reigniting concerns around the company's margins. Simply put, if TGT saw an upswing in sales, but not an accompanying improvement in earnings, it suggests that it relied on markdowns and promotions to drive demand. Rewinding to Q3, operating margin contracted by 60 bps yr/yr partly due to price cuts and TGT telegraphed that it would remain in a promotional mode as it looked to reconnect with budget-conscious customers.
• That's not the only concern. The company's Q4 (ending January) +1.5% comp guidance also indicates that sales have decelerated in January since it disclosed that comparable sales increased by 2% in November and December. Therefore, the bump experienced during the holiday shopping season didn't seem to translate into a more sustainable uptrend in sales.
• With that said, there are some notable bright spots. For instance, TGT saw a meaningful sales acceleration from Q3 in discretionary categories such as apparel and toys. This is especially crucial for TGT given that around 70-75% of its sales come from discretionary categories, which has put it at a distinct disadvantage against its rival Walmart (WMT). The shift in spending patterns towards necessities like food, beverage, and everyday items has worked in WMT's favor, as illustrated by its stronger Q3 U.S. comp growth of 5.3% compared to just 0.3% for TGT.
• Another positive for TGT is that it continues to see traffic growth in both its stores and digital channels. In fact, the company noted that December marked its eighth consecutive month of yr/yr traffic growth. Looking at the November and December period, guest traffic was up 3%, while digital sales grew by nearly yr/yr for the same period. TGT has established some solid momentum in its e-Commerce channel as digital comps increased by 11% last quarter.

The main takeaway is that TGT's updated guidance for Q4 reveals a mixed picture for the struggling retailer. On one hand, the improvement in sales for discretionary categories is a meaningful development, but on the other hand, relying more heavily on promotions and markdowns to drive those sales doesn't bode well for TGT's margins and profitability.