Target Q3 Profit, Revenues Miss

by Ike Obudulu Posted on November 20th, 2018

Minneapolis, Minnesota, USA :  Target Corporation (NYSE: TGT)  reported third-quarter earnings and comparable sales below estimates on Tuesday at a time when a strong economy has boosted consumer spending at rival retailers, sending its shares down 7 percent in premarket trade.

Sales at stores open at least a year rose 5.1 percent, short of analysts’ estimates of a 5.21 percent increase, according to IBES data from Refinitiv.

Profit missed expectations as price cuts, higher wages and investments in its online business ate into margins. Excluding items, Target earned $1.09 per share in the quarter, below the average estimate of $1.12 per share.

The retailer remained confident it could reach its earlier full-year earnings outlook, hoping its investments help it compete against online behemoth Inc (AMZN.O) and brick-and-mortar rivals like Walmart Inc (WMT.N) during the key holiday season.

Target will offer free two-day shipping on hundreds of thousands of items through Dec. 22 with no minimum order or membership required.

Sales rose to $17.59 billion, below the average estimate of $17.8 billion.

Its third-quarter performance comes after it reported its best comparable-sales growth in 13 years during the second quarter.

Target’s shares dropped 7.1 percent at $72.25 in premarket trading.

“Our team delivered another outstanding quarter, driving comparable traffic and sales growth of more than 5 percent and earnings per share growth of more than 20 percent,” said Brian Cornell, chairman and chief executive officer of Target Corporation. “We’ve made significant investments in our team heading into the holidays and they are ready to serve our guests with a comprehensive suite of convenient delivery and pickup options, a wide range of new products and unique gift ideas and a strong emphasis on low prices and great value. We plan to leverage our current momentum into 2019, when we’ll achieve greater scale across the full slate of our initiatives – creating efficiencies and cost-savings, further strengthening our guest experience and positioning Target for profitable growth in the years ahead.”

For the fourth quarter, Target expects comparable sales growth of approximately 5 percent, consistent with the Company’s year-to-date performance through third quarter 2018. For the full year, the Company continues to expect Adjusted EPS of $5.30 to $5.50 and GAAP EPS of $5.41 to $5.61. The 11-cent difference between expected full-year Adjusted EPS and GAAP EPS is driven by discrete items already reported through third quarter 2018.

The Company announced today that it plans to issue a post-holiday financial update on Thursday, January 10, 2019.

Operating Results

Total revenue of $17.8 billion increased 5.6 percent from $16.9 billion last year, reflecting sales growth of 5.7 percent and other revenue growth of 1.6 percent. Third quarter sales growth included a 5.1 percent increase in comparable sales and a 0.6 percentage point contribution from non-mature stores. Comparable digital channel sales grew 49 percent and contributed 1.9 percentage points of comparable sales growth. Operating income was $819 million in third quarter 2018, down 3.3 percent from $847 million in 2017.

Third quarter operating income margin rate was 4.6 percent, compared with 5.0 percent in 2017. Third quarter gross margin rate was 28.7 percent, compared with 29.6 percent in 2017. This decline reflected higher supply chain costs driven by growth in digital fulfillment costs and other expenses related to the size and timing of holiday-related inventory receipts compared with last year, partially offset by the benefit of merchant initiatives. Third quarter SG&A expense rate was 22.1 percent in 2018, essentially flat to last year. Third quarter SG&A results reflected continued investments in our team, specifically hours, training and wages, which were offset by continued cost discipline across the enterprise.

Interest Expense and Taxes from Continuing Operations

The Company’s third quarter 2018 net interest expense was $115 million, down 54.1 percent from $251 million last year, primarily driven by early debt retirement costs recognized in third quarter last year. Third quarter 2018 effective income tax rate from continuing operations was 13.6 percent, compared with 22.2 percent last year. Third quarter 2018 effective income tax rate from continuing operations reflects the net tax effect of the federal tax reform legislation (the Tax Act), including both ongoing and discrete benefits.

Capital Deployment

In third quarter 2018 the Company made capital investments of $1,017 million in property and equipment, and returned $863 million to shareholders, including:

Dividends of $337 million, compared with $339 million in third quarter 2017, reflecting a decline in share count partially offset by an increase in the dividend per share.
Share repurchases totaling $526 million that retired 6.3 million shares of common stock at an average price of $84.00.
As of the end of the third quarter, the Company had approximately $1.8 billion of remaining capacity under its current $5 billion share repurchase program, reflecting third quarter purchases and an accelerated share repurchase transaction which will settle in the fourth quarter.

For the trailing twelve months through third quarter 2018, after-tax return on invested capital (ROIC) was 15.8 percent, compared with 13.4 percent for the twelve months through third quarter 2017. Excluding the discrete impacts of the Tax Act, ROIC was 13.9 percent for the trailing twelve months ended November 3, 2018.

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