Target (TGT) Pre-Earnings: More Growth Ahead

Shareholders of discount retailer Target (TGT) should mark their calendars for November 20, as the company prepares to unveil its third-quarter results. The consensus expects comparable sales growth of 1.6% for the quarter, suggesting some consistency with the previous quarter’s performance — the first quarter in five with positive comparables. However, I remain Neutral on the stock, awaiting more evidence that the company’s turnaround is sustainable. While the company is regaining market share, it has faced challenges in recent quarters, trailing behind major retail competitors such as Walmart (WMT), as shown in the chart below.

Additionally, adjusted earnings per share (EPS) is expected to exceed $2.30, which comfortably falls within the company’s guidance range of $2.10 to $2.40, which was provided in August of this year. In this article, I’ll discuss what to expect from Target’s earnings and explain why I have a Neutral stance on the stock.

Target’s Outstanding Quarter

Target reported solid results in this year’s second quarter, although I still maintain a Hold rating on the stock. Same-store sales were up 2%, marking the first time in five quarters that the company has seen sales growth. This is a significant turnaround after Target had been losing market share to competitors such as Walmart amid a challenging environment of rising interest rates, inflation, and weak consumer spending. However, the strength of essential grocery items appears to be cushioning those impacts.

One of the key highlights for Target in Q3 is likely to be its strong performance in the digital space. The company has done an excellent job focusing on same-day delivery and same-day pick-up, which is contributing to its comparable sales growth.

Target’s profit also exceeded analysts’ expectations, reporting earnings of $2.57 a share—significantly better than the $2.18 Wall Street had forecasted. This was accompanied by revenue of $25.45 billion, which also surpassed expectations. More importantly, for the full-year, Target raised its earnings guidance to a range of $9.00 to $9.70 per share, up from a previous forecast of $8.60 to $9.60. Following the results, Target’s stock rose 9%.

Traffic and Margins

Much of my skepticism surrounding the Minneapolis-based retailer stems from the need for consistency to demonstrate that the company is heading in the right direction. Target has already provided Q3 2024 guidance, forecasting comparable sales growth between 0% and 2%. If the higher end of this range is achieved, it would at least match the performance of the previous quarter. Given that Target has been recovering from a series of missteps, including a -4.3% comp decline in Q4 2023, maintaining consistency with its upcoming print would mark a significant achievement.

Another key factor to watch will be foot traffic at Target’s stores, which are critical to gauging consumer activity. In the previous quarter, comparable sales growth was entirely driven by traffic, reflecting the benefits of several guest-focused initiatives. CEO Brian Cornell emphasized that these initiatives reflect Target focusing on leveraging national brand partnerships, its own brands, and other unique collaborations. The most notable of these initiatives has been the reduction of prices on more than 5,000 of the most frequently purchased items.

Given that Target operates with a low-margin, high-volume business model, its profitability will be closely scrutinized. In Q2, the company reported an operating margin of 6.4%, a 160-basis-point increase from a year earlier. This margin expansion was driven by better-than-expected results from recent store inventory counts. When asked how the company plans to maintain operating margins above 6%, management highlighted their ongoing efforts to improve efficiencies across the business. They anticipate this momentum will continue into at least Q3 and Q4.

Guidance for the Holiday Quarter

Another factor that could influence reactions to Target’s Q3 results will be management’s guidance for Q4, the critical holiday quarter for retailers. Retail and consumer product companies are facing a challenging environment, with discretionary spending expected to be constrained this year. According to a report by S&P Global Ratings, U.S. holiday sales growth is forecast to slow to around 3% in 2024, down from 4.7% in 2023 and below the 10-year average of 5.3%.

That said, the report also notes that “value perception will separate retailers,” a point frequently emphasized by Target’s management team during its latest earnings call, where they highlighted their focus on value. However, this perception is not universally shared on Wall Street. For instance, Citigroup (C) analyst Paul Lejuez expects management to take an optimistic view of the holiday season, while Greg Melich of Evercore ISI (EVR) believes that, following easier comparisons with Q3’s shrink accruals, Target’s management will likely adopt a more conservative outlook.

TGT’s Valuation

Starting purely from a valuation perspective, Target trades at a relatively modest mid-teens price-to-earnings (P/E) ratio, compared to its five-year average in the high teens. While I’m not ready to buy just yet, the stock is certainly becoming more compelling. Assuming long-term EPS growth remains resilient despite macroeconomic headwinds facing consumer spending, a five-year forward PEG ratio of about 1.45x seems reasonable.

The combination of solid fundamentals and an attractive price places Target near the top of my list of stocks to consider buying on weakness. However, before pulling the trigger, I want to wait for stronger signs of consistency in comparable sales and traffic, as well as more clarity on how the company navigates the uncertainty surrounding a potentially challenging holiday season.

Is TGT Stock A Buy?

The consensus among Wall Street analysts for TGT stock is a Moderate Buy, with 17 out of 27 analysts offering a bullish outlook and 10 maintaining a neutral stance. The average price target of $181.57 implies upside potential of 17.16%.

Read more analyst ratings on TGT stock

Conclusion

While Target is likely to report a strong third quarter with comps near last quarter’s levels, I need to see more consistency before turning bullish. Despite an appealing valuation, I maintain a Hold rating on TGT stock, as I’m not convinced by the strategy to maintain stable margins while relying on price cuts to drive traffic. Also, uncertainty concerning consumer spending during the holiday season remains high.

Disclosure