Target Corporation (TGT) Earnings Drop, Trims Outlook

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Amid soft economic environment, cautious consumer spending and intense competition, Target Corporation (TGTAnalyst Report), the operator of general merchandise and food discount stores in the United States, posted third-quarter fiscal 2013 results. The quarterly earnings including U.S. and Canadian operations came in at 54 cents a share, sharply down from 96 cents reported in the prior-year quarter. Consequently, the company trimmed its earnings forecast.

Target’s shares slipped 4% to $63.85 during pre-market trading hours.

Target’s adjusted earnings of 84 cents a share dropped from 90 cents delivered in the year-ago quarter. This relates to results from U.S. operations only. Analysts polled by Zacks had projected earnings of 62 cents a share for the quarter.

Let’s Unveil the Picture

Total revenue climbed 1.9% to $17,258 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $17,541 million. Sales for the U.S. segment, which now comprise of U.S. Retail and U.S. Credit Card segments after the sale of U.S. credit card portfolio in Mar 2013, came in at $16,925 million and rose by 2%.

Minneapolis-based Target said that comparable-store sales for the quarter inched up 0.9% compared with 2.9% increase registered in the prior-year quarter. The number of transactions edged down 1.3%, however the average transaction amount climbed 2.2% in the quarter.

Gross profit at the U.S. segment rose marginally by 0.9% to $5,076 million, whereas gross margin contracted 30 basis points to 30%. Segment operating income dipped 11.4% to $977 million, whereas operating margin shriveled 80 basis points to 5.8%.

Target’s credit card penetration increased 150 basis points to 9.5%, whereas debit card penetration expanded 440 basis points to 10.4% during the quarter. Total store REDcard penetration climbed to 19.9% from 14% in the year-ago quarter.

We believe Target’s P-fresh remodel program, 5% REDcard Rewards program and Price Match strategy will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. In order to tap the urban markets where real estate remains a constraint, the company plans to open smaller-format stores called CityTarget.

Moreover, in order to expand its global footprint, the company is eying Canadian market with a store opening plan of 124 in 2013. Sales generated during the quarter were $333 million.

Target’s credit and debit cards penetration in Canada came in at 1.4% and 1.5%, respectively. Total store REDcard penetration came in at 2.9%.

Other Financial Details

During the quarter, Target did not buyback any shares but paid dividends of $271 million. Till date the company has bought back about 21.9 million shares at a price of $67.41, aggregating $1.47 billion, and paid dividends of $734 million.

The company ended the quarter with cash and cash equivalents (including short-term investments of $3 million) of $706 million, long-term debt and other borrowings of $12,665 million and shareholders’ equity of $16,156 million.

Stores Update

Target currently operates 1,797 stores, of which 293 are general merchandise stores, 1,245 are expanded grocery assortment, 251 are SuperTarget stores and 8 are CityTarget stores.

Strolling Through Guidance

Target now projects adjusted earnings in the range of $1.50 to $1.60 for the fourth quarter, excluding dilution of 22 cents to 32 cents due to entry in the Canadian market. For fiscal 2013, management trimmed its outlook and now anticipates adjusted earnings between $4.59 and $4.69 per share, excluding dilution of 95 cents to $1.05 due to entry in the Canadian market.

Earlier, the company had projected adjusted earnings in the band of $4.70 to $4.90 per share.

Let’s Conclude

Target is persistently trying every means to keep afloat in an economy, which is still not completely awakened from the state of hibernation. Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term.

We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.

The economy has not yet recovered fully. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.

Moreover, a greater concentration of the company’s revenue generating capabilities in limited regions of the United States, poses a competitive threat to Target, compared with Wal-Mart Stores Inc. (WMTAnalyst Report) and Costco Wholesale Corp. (COSTAnalyst Report), which are geographically diverse and more resourceful.

Currently, Target holds a Zacks Rank #3 (Hold). A better ranked stock in the retail sector is Dollar Tree, Inc. (DLTRSnapshot Report), which carries a Zacks Rank #2 (Buy).

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