Will Target Earnings Hit the Bullseye After a String of Strong Retail Reports?

Target Corporation (TGT) reports third-quarter earnings before the opening bell on Tuesday, November 20. Here’s a look at what might be expected from the big-box retailer's results.

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After a tough 2017 where skepticism was rampant regarding brick-and-mortar retailers’ ability to adapt to threats from online retailers, Target (TGT) appears to be proving the naysayers wrong as last quarter’s sales and earnings came in above analyst estimates and ecommerce growth accelerated faster than expected. 

The next update from the company will be TGT’s earnings, scheduled for before market open on Tuesday, Nov. 20. 

For Q3, TGT is expected to report adjusted EPS of $1.12, up from $0.91 in the prior-year quarter, on revenue of $17.78 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 6.7% year over year. 

There are two metrics that analysts and investors have been honing in for some time: comp store sales and comp digital sales. In Q2 2018, TGT reported a 4.9% year-over-year increase in comp store sales, which was almost entirely driven by traffic growth, which management called “unprecedented.” TGT’s ecommerce sales last quarter were up 41% year over year, accelerating from the 32% growth in Q2 2017. 

Whether or not TGT can keep up the pace for stores and digital growth will be a question answered on Tuesday. Many retailers that had stronger-than-usual traffic growth in Q2 indicated that they thought a lot of that was because of bad weather in the first quarter of the year, and they didn’t expect that same strength to carry through the rest of the year. 

One of the primary factors that TGT management has highlighted in recent quarters as a traffic driver has been the ongoing remodels of new stores. On average, TGT said they were seeing about 2% to 4% sales lifts in remodeled locations on last quarter’s earnings call. At the time, the company was still targeting remodeling roughly 1,000 stores over a three-year period, ending in 2020. 

As part of the remodels, TGT has said it specifically focused on revamping its toy departments to capitalize on the business disruptions facing Toys “R” Us and Babies “R” Us, so it could  be interesting to see if management indicates that it expects a meaningful impact in the holiday season from this. Management’s latest guidance for 2018 called for adjusted EPS of $5.30 to $5.50. 

Other areas that are likely to be of interest for analysts and investors are the company’s ongoing efforts to ramp up ecommerce efforts and expand fulfillment options. Shipt, the same-day delivery service that TGT bought for $550 million in 2017, had been expanded to 1,100 Target stores by the end of Q2 2018. Shipt also had 19 retail partners, including CostCo (COST), that it delivers groceries for in certain markets.

TGT has also expanded Drive-Up, its curbside pickup option for online orders. At the start of the year the company had 50 stores offering it, 800 by the end of the second quarter, and management said it plans to offer the service in more than 1,000 locations by the holiday season this year. 

The continued focus on digital fulfillment has weighed on margins. Management blamed higher costs in these areas for operating income margins dipping to 6.4% in Q2 2018, down from 6.6% the year before. 

Where from here? TGT hit a new all-time high of $90.39 on Sept. 10. Heading into earnings tomorrow, the stock is trading right around the $80 mark, where the stock has seen some support over the past few months. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Target Options Activity

TGT is up just under 18% year to date, and that’s after about a $10 pullback from the all-time high of $90.39 it hit on Sept. 10. With the stock closing at $79.68 on Friday, options traders have priced in a 5.3% stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 65th percentile as of this morning. 

This week will be a little different since markets will be closed on Thursday and end the day early on Friday as well. Looking at the Nov. 23 weekly expiration there has mostly been a smattering of activity right around the money in recent trading. From an open interest perspective, the 85-strike call stands out with 7,449 contracts open as of Monday morning. The next closest is the 84-strike put with 2,882 contracts open. 

At the Dec. 21 monthly expiration, calls have been active at the 85-strike price. On the put side, activity at the 72.5 strike stands out as there was volume of 10,192 contracts during Friday’s session, almost seven times higher than any other strike. While the 72.5-strike put is a ways out of the money compared to the stock’s price these past few months, it is a few points above the high-$60 and low-$70 area where there was a lot more support/resistance in the first half of the year

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,

JJ

@TDAJJKinahan

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