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Target Could Hit the Earnings Mark, But Sales are Key Metric

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August 18, 2015
Target Could Hit the Earnings Mark, But Sales are Key Metric

More insight on these head-scratching consumer-spending trends is coming our way when retailer Target (TGT) reveals how its sales and earnings turned out for Q2.

Some industry analysts fear that Target’s retreat earlier this year from Canada will impact its geographical diversification—most of its competitors have considerably bigger footprints—and could have a bearing on the quarter’s bottom line.

In the earnings release due before Wednesday’s opening bell, analysts reporting to Thomson Reuters are looking for an average per-share profit of $1.11 on topline sales of $17.40 billion for TGT. That’s a 42% jump from last year’s $0.78 a share.

Industry analysts are expecting sales to be flat and likely under increased scrutiny. This report will follow revenue misses for Macy’s (M), Kohl’s (KSS), and other retailers in a quarter increasingly notable for its disappointing revenue story. Remember that last year’s results included sales from the shuttered Canadian operations, so digging out a clean number may challenge Wall Street.

Walmart’s results can be somewhat telling of what to expect from Target. Walmart lowered its full-year outlook and missed expectations, but much of that was the result of internal pressures on margins as well as foreign exchange issues, the company said in its Tuesday release. WMT’s U.S. sales at stores open longer than a year were up 1.5% and traffic is improving, which could mean that the consumer is looking to the deep discounter to cut costs. That’s the fourth straight quarter that this important sales measure has risen.

Industry analysts expect to see better Target foot traffic both in stores and online, but some analysts are worried that the retailer’s reliance on its signature categories of style, apparel, children’s goods, and wellness leaves it vulnerable to the ebb and flow of consumer spending.

Early Tuesday, short-term options traders were pricing in a relatively tame 2.9% move in either direction for TGT shares around the earnings release, according to TD Ameritrade’s thinkorswim® platform. Volatility is high, at the 75th percentile. Put volume also picked up from where it started the week. Action this morning has drawn out buyers of the Aug 79 ½ puts and of the Aug 77 puts (puts contracts represent the right, but not the obligation, to sell the underlying shares at a set date and price).

As investors await Target’s post-Canada performance, shares have been stuck in sideways action for much of the spring and summer (figure 1). TGT shares just bounced off their 200-day moving average, and resistance is now near 81.90.

target-stock-sideways

FIGURE 1: MOVING TARGET?

Target’s stock is up a solid 35% over the past year. But since late February, the stock has moved mostly sideways, with a blip north here and there, before slipping. It’s now only marking a 4% gain since the beginning of the year. Chart source: TD Ameritrade’s thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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