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Can Target Hit Bull's-eye After Other Retailers Miss the Mark?

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February 23, 2016
Target earnings report

Target’s (TGT) effort to turn its focus back to its core business – selling chic merchandise in U.S. stores – will be in focus Wednesday when the discount retailer reports its Q4 results. Did shuttering Canadian stores and shedding a pharmacy business bolster earnings?

If analysts reporting to Thomson Reuter’s are, well, on target, it looks like the company might. For the quarter, the average forecast sits at $1.54 a share, a near-3% increase over the same period a year ago amid flat year-to-year revenue expectations of $21.8 billion. Analysts admit that’s not exactly awe-inspiring but note the Canadian store closings are not even a year old and the hand-off of the pharmacy business to CVS (CVS) just happened in December.

Analysts are likely to be listening to what’s ahead as TGT strives to improve its merchandise and in-store shopping experience at a time when e-commerce is making strides in enhancing top-line sales. The Minneapolis-based retailer’s forecast and discourse on e-commerce vs. bricks-and-mortar sales might help analysts measure the future of in-store sales, they say.

Five-quarter Winning Streak on the Line

TGT has surprised Wall Street the last five quarters with earnings that outpaced forecasts. Can it do so again Wednesday? That’s a big question considering the Q4 results of other big retailers, Wal-Mart (WMT) and Nordstrom (JWN), for example, missed the marks.

TGT’s stock on a year-over-year basis is off some 4% and, except for a couple months late last year, has performed steadily better than the broader market. Since bottoming at a 52-week trough in late January, the stock is up nearly 8%.

Short-term option traders have priced in a potential 4% share price move in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator.

Implied volatility is relatively low at the 54th percentile ahead the report. This is a shift away from high volatility amid a deep mid-year drop in the stock. 

Early Monday call buyers were active in the weekly Feb 74.50 strike at two-and-a-half times the normal trading. Last week, put buyers favored the Feb 70 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and 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.

FIGURE 1: BOUNCE BEFORE EARNINGS.

 Since bottoming at a 52-week trough in late January at $66.46, TGT is up nearly 8%. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.