Aug 20, 2019

Target Deal Days to Battle Against Tech Glitch, Weather in Earnings

Janet Freund, Bloomberg News

A woman charges her phone outside a Target Corp. store is seen at City Point in the Brooklyn borough of New York, U.S. Photographer: Mark Kauzlarich/Bloomberg , Bloomberg

(Bloomberg) -- Target Corp. has its work cut out for it as the mass-merchant retailer is facing difficult year-over-year same-store sales and traffic comparisons, broad macro concerns, and tariff exposures.

Analysts are hoping that Target’s Deal Days, its answer to Amazon.com’s Prime Day, and digital sales strength are enough to overcome a Father’s Day weekend technology glitch that prevented customers from making purchases at its stores for a two-hour period on June 15 and unkind weather trends in the earlier part of the quarter.

This quarter’s set up comes on top of a 6.5% same-store sales gain a year ago, which was the best in 13 years amid Toys ”R” Us and Babies ”R” Us U.S. store closures, and an “unprecedented” 6.4% growth in traffic.

In addition, the shares are up 31% this year compared with a gain of 21% for Walmart Inc., and 16% for the S&P 500, and not far from a record high. With only 4% upside to the average 12-month price target of 21 analysts surveyed by Bloomberg, one might say shares are priced for perfection.

Here’s what analysts are saying ahead of the report:

Credit Suisse, Seth Sigman

Key indicators including Nielsen, SpendTrend, Credit Suisse’s department store index are supportive of comparable sales in the 2.5%-3.0% range, including weakness in temperature-sensitive categories such as apparel
Still expects strong digital growth, even on top of 2QFY19’s 41% growth
Sigman recently lowered his 2Q gross margin estimate given Walmart and Macy’s markdown comments and Target’s system-wide register outage in June
Target Deal Days, held in July, was likely a positive for comp. sales
“With macro concerns in the backdrop, we believe it has to be a relatively clean quarter for TGT stock to work,” Sigman said
Rates outperform, price target $90

Telsey Advisory, Joseph Feldman

Estimates e-commerce growth of ~25%; to benefit from debut of online Deal Days, website enhancements, expansion on online products, faster fulfillment
Expects continued outperformance in baby and toys, given continued share gains following the closings of Toys ”R’ Us stores; seasonal and summer products, supported by the partnership with Vineyard Vines and the newly launched Sun Squad collection; fashion and home should benefit from new brands and products
New tariffs on List 4 items should result in higher costs, but believes Target’s ability to take a portfolio approach to dealing with higher costs should offer flexibility; its current forecast covers a wide range of assumptions
Rates outperform, price target $92

Barclays, Karen Short

“All eyes will be on TGT’s ability to ‘comp the comp’ as the company laps the benefits in the baby and toys categories” last year due to the closures of the Toys "R" Us and Babies "R" Us stores
Unfavorable weather likely drove additional markdowns in seasonal categories, but this is well understood by the Street
Will be watching forecast update, traffic and ticket trends and category performance, digital growth/fulfillment cost trends
Rates overweight, price target $95

Bloomberg Intelligence, Jennifer Bartashus

2Q comparable sales “may moderate slightly, as the company laps the closing of Toys ‘R’ Us and Babies ‘R’ Us stores and faces difficult comparisons vs. a year ago,” when total comp. sales rose 6.5%
Seasonal merchandise sales may have also been dampened by poor weather early in the quarter and Target had a nationwide point-of-sale outage on June 15, disrupting in-store sales for several hours
Remodeled stores continue to generate traffic and same-store sales lifts, aiding overall performance, while store-based fulfillment is aiding online sales growth by enabling same-day services and reducing shipping time and costs

Quo Vadis Capital, John Zolidis

Sales drivers include increased sales of private label, share capture from defunct competitors, e-commerce growth, the benefit from remodels, and a strong consumer backdrop
Zolidis is looking for the 9th straight quarter of traffic and comp. sales growth; believes Target is taking share in e-commerce, as well
Sales growth and margin stabilization should be favorable for the shares

Just the Numbers

2Q adjusted EPS from continuing operations estimate $1.62; TGT forecast $1.52 to $1.72
2Q sales estimate $18.25 billion (range $18.04 billion to $18.47 billion)
2Q comparable sales +3.00% (Consensus Metrix average of 19 estimates); TGT forecast comp. sales up low- to mid-single digits
2Q gross margin estimate 30.2%
3Q adjusted EPS estimate $1.16 (range $1.11 to $1.21)
FY adjusted EPS estimate $5.93; saw $5.75-$6.05
TGT forecast Fiscal 2020 comp. sales up low- to mid-single digits and a mid-single digit increase in operating income

Data