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Earnings: Can Target's (TGT) Grocery Sales Feed Bottom Line?

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August 16, 2016
Grocery market staggers as Target looks to revitalize food sales.

On a conference call last quarter, Target (TGT) Chief Executive Brian Cornell warned analysts and investors that the big-box retailer was suffering from “some trip erosion” in the grocery aisles. What measures has TGT taken to stem the erosion?

Comparable-store sales, an important year-over-year metric in the retail industry, in food dropped during Q1, while sales in other segments like home and apparel, style, baby, and kids were robust, Cornell said on the call. He blamed part of the results on deflationary pressures on commodity prices, something all grocers have wrestled with this year, and he also noted “a meaningful disruption” based on a rework of the grocery store aisles, adding 1,000 new items.

But the real culprit, he said, is the pullback of customers coming for that “fill-in trip.” The “stock-up trips” where consumers fill their carts with everyday staples and then some for the pantry are still robust, Cornell said. But the shorter replacement trips for a gallon of milk or a loaf of bread, which help generate foot traffic and those high-margin, compulsive point-of-purchase sales that grocers need to juice the bottom line, were slowing.

Cornell said the company was putting new practices in place to stem that tide. He added that the “reinvention” of the grocery business had already begun in a few dozen stores in Los Angeles and had logged “very positive guest feedback” and better-than-expected results.

Executives cautioned that Q2 same-store sales would be flat to 2% lower, partly owing to the choppy sales all brick-and-mortar retailers have experienced this year as they battle the so-called “Amazon effect” of the shift in shopping behavior to online purchases.

As the important back-to-school shopping season begins soon, analysts also say they’re interested in how strong the early momentum is and what TGT sees as classes commence.

Analysts reporting to Thomson Reuters are forecasting a per-share profit of $1.12, lower by 8% from year-ago results. Revenues are projected to decline by 7% to $16.17 billion.

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

Options trading activity has been pretty evenly split at the 76-strike calls and the 75- and 74-strike puts. The implied volatility is at the 27th percentile. (Please remember past performance is no guarantee of future results.)

A note to earnings hawks: TGT has tweaked its release and conference call times, pushing them up well ahead of the market open for the first time. The earnings release will roll off the presses at 6:30 AM ET and executives will be ready to start chatting with analysts at 8:00 AM ET, according to the company.

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.

FIGURE 1: MISSING THE MARK.

TGT shares sunk to a 52-week low after Q1’s sluggish results and cautionary outlook, but have recovered some 12% of value since then as market benchmarks like the S&P 500 reached new record highs. Data source: Standard & Poor’s. Image source: the TD Ameritrade thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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