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Target Corporation Q2 2017 Earnings Preview: E-Commerce, Food In Focus

Target Q2 2017 earnings are set for release on Wednesday before opening bell, and Wall Street is expecting earnings of $1.19 per share on $16.3 billion in sales. In last year’s second quarter, the big box retailer reported $1.23 per share on $16.2 billion in revenue.

Target q2 2017 earnings
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Target Q2 2017 earnings

In a note last week, Jefferies analyst Daniel Binder pointed out that Target Q2 2017 earnings will be ahead of plan, as management preannounced that recently. However, the company neglected to release many details on just how much ahead of plan the second quarter was.  Binder believes July was a good month for discounters, although he also said that he wouldn’t be surprised if Target still beat his recently revised estimates modestly.

After the preannouncement, he increased his comparable store sales estimate to an increase of 0.5% year over year, while he had previously been expecting a 1% decline in comparable store sales. He pegs Target Q2 2017 earnings at $1.20 per share now, up from his previous estimate of $1.10 per share. He still expects the results to indicate loss of market share in certain areas, like food and home essentials, and he maintains his Hold rating because he’s still skeptical about the retailer’s strategies in food and e-commerce.

He would like the big box retailer to shift its food strategy to “a more complete offering” and to develop an online marketplace to drive traffic in the long term. However, he also understands why Target management is currently focusing on areas in which the company’s tests show greater evidence of success.

Comparable store sales growth driven by e-commerce

In a note dated Monday, Macquarie analyst Bob Summers said he feels “a certain anti-climactic vibe” going into the Target Q2 2017 earnings release because of management’s preannouncement, but he warned that there are some factors that might result in volatility in Target shares. One such factor is the “breadth, cadence and composition of comparable store sales.

Summers believes growth in online sales drove Target’s second-quarter growth. Like Binder, he is looking for an increase of 0.5% in comparable store sales. He adds that his estimate is made up of a decline of 0.7% in Target’s store channel and a 1.2% increase in the digital channel.

He also called out the margins as an important element of the report, particularly when combined with the investments that are needed to sustain sales momentum in both the near- and long-term. He believes Target’s operating margin compressed by about 90 basis points, falling to 6.6% and driven by a contraction of 70 basis points in gross margin and 40 basis points in SG&A deleverage. He believes that investors will not take too kindly to Target management offsetting a negative performance using tax benefits.

What else could drive stock price moves around Target Q2 2017 earnings?

Other areas of importance he called out were the strength of Target’s signature categories and brand development; solutions for fixing the food business and urgency for doing so; progress on the plans to address “encroachment from other channels”; and any changes in guidance for the full year. Summers believes that any positive commentary on any of the factors he discussed will sustain the retailer’s stock momentum, and he sees this as likely.

He adds that the options market is pricing in a 4.8% stock price move in either direction in connection with Target Q2 2017 earnings. The company’s stock ticked lower on Tuesday, falling by as much as 0.54% to $55.49.