Why Investors Are Running Away from Target

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Target Corp. (NYSE: TGT) reported third-quarter 2018 results before markets open Tuesday morning. The big-box retailer posted adjusted diluted earnings per share (EPS) of $1.09 and $17.82 billion in revenues. In the same period a year ago, the big-box retailer reported EPS of $0.90 on revenue of $16.87 billion. Third-quarter results compare to consensus estimates for EPS of $1.12 and $17.8 billion in revenue.

Same-store sales rose 5.1% compared with the third quarter of 2017. Digital channel sales rose 49% and contributed 1.9 percentage points to same-store sales growth. Store traffic rose 5.3% in the quarter. Operating income declined by 3.3% from $847 million last year to $819 million.

Operating income margin dipped from 5% to 4.6%, and gross margin rate slipped from 29.6% to 28.7%, reflecting higher supply chain costs driven by growth in digital fulfillment costs and timing of holiday-related inventory receipts.

In its outlook for the fourth quarter and the 2018 fiscal year, Target said it expects same-store sales growth of approximately 5%, matching growth for the first three quarters of the year. For the full year, the company reaffirmed its adjusted EPS forecast of $5.30 to $5.50.

Analysts had forecast EPS for the fourth fiscal quarter at $1.51 on revenues of $22.93 billion. For the full-year analysts are looking for EPS of $5.41 and revenues of $75.25 billion.

Brian Cornell, Target’s CEO, said:

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.

While Target’s revenue met estimates, sales did not. Similarly, same-store sales missed analysts’ estimate for a rise of 5.2%, and adjusted EPS was also below expectations. Investors are not in a forgiving mood these days, and the company’s stock is about to get beaten up.

Target’s shares traded down nearly 10% in Tuesday’s premarket at $70.15, in a 52-week range of $55.25 to $90.39. The consensus 12-month price target was $91.47 before results were announced.