Target Earnings Preview: What Might Be Expected for Q2?

Big-box retailer Target reports earnings before market open Wednesday, August 22. Here’s a look at what might be expected from its quarterly report.

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The busy stretch of retail results continues with Target’s (TGT) earnings report scheduled for before market open on Wednesday, August 22.

For Q2, TGT is expected to report adjusted EPS of $1.40 on revenue of $17.29 billion, according to third-party consensus analyst estimates. That estimate is right in the middle of management’s guidance for adjusted EPS between $1.30 and $1.50. In the same quarter last year, adjusted EPS came in at $1.23 on revenue of $16.43 billion. 

The last time around, TGT missed earnings estimates and the stock opened down more than 6%, although within two weeks it had recovered. TGT’s same-store sales growth in Q1 slowed to 3% from 3.6% in the previous quarter. 

While some bearish analysts latched onto the slowdown in same-store sales, TGT reported 3.7% traffic growth, which was the company’s highest quarterly traffic growth in more than 10 years. For the most part, analysts are expecting similar traffic trends in the second quarter, driven by the start of spring, store redesigns and exclusive product lines. 

Beyond the brick-and-mortar operations, the company’s online efforts have been a big focus for analysts and investors as well. E-commerce sales were up 28% year over year in Q1, and management said they accounted for roughly 1.1% of the company’s overall sales growth during the quarter. 

While e-commerce helped boost sales, it’s also been a factor that has weighed on profitability, something that’s been seen at many retailers as they invest heavily to build out multichannel capabilities. TGT’s management said they expect operating margin declines to stabilize in 2018, although that wasn’t the case in the first quarter of the year. 

Buybacks and Dividends

In the first quarter of 2018, TGT said it repurchased $494 million worth of shares at an average price of $71.24. After those buybacks, the company indicated it still had $2.8 billion remaining of its $5 billion share repurchase authorization. 

In June, TGT upped its dividend by 3.2% to a quarterly payment of $0.64 per share, giving it a current yield of just over 3%. TGT has paid consecutive dividends since 1967, when the company first went public. 

2018 Rally. TGT has been beating the S&P 500 (SPX) by a wide margin in 2018 and is up 22.5% so far this year. Despite the stock’s comeback since mid-2017, shares are just now getting back to their 2016 highs. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Target Options Trading Activity

Around the upcoming earnings release, options traders have priced in a 5.6% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 51st percentile as of this morning. 

In short-term trading at the August 24 weekly expiration, calls have been active at the 84 and 86.5 strike prices. On the put side, recent trading has been concentrated at the 80 and 82.5 strikes. 

Looking at the September 21 monthly expiration, recent call trading has been concentrated at the 87.5 and 90 strike, while activity on the put side has been heavier at the 82.5 strike. Open interest is significantly higher at the 82.5 strike call, compared to strikes for both calls and puts. 

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.

What’s Coming Up

Earnings season continues to wind down and the pace of reports has slowed, although there’s still some more retailers to report. Home improvement retailer Lowe’s (LOW) reports the same morning as TGT and L Brands (LB) reports after the close the same day. Alibaba (BABA) reports before the open on Thursday, August 22; and Gap (GPS) reports after the bell that day. 

For a look at what else is going on, check out today’s Market Update if you have time.

Good Trading,
JJ

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