Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted better-than-expected third-quarter 2011 results on the heels of higher sales and improved profitability across its credit card business.
Street analysts had enough time to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.
Last Quarter Synopsis
Target unveiled its third quarter financial results on November 16. The quarterly earnings of 87 cents a share surged 28% from 68 cents earned in the prior-year quarter. The Zacks Consensus Estimate for the quarter was 74 cents.
Including special items, earnings came in at 82 cents compared with 74 cents posted in the year-ago quarter. The third quarter of 2011 results included expenses in connection with the company’s investments in the Canadian market, which lowered earnings by approximately 5 cents a share. The prior-year earnings included a gain of 6 cents a share related to favorable state income tax settlements.
Total revenue for the quarter climbed 5.1% to $16,402 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $16,330 million. Retail sales grew 5.4% to $16,054 million as shoppers are gradually opening up their wallets but still remain cautious on their spending. The company indicated that revenue from the Credit Card segment tumbled 8.2% to $348 million.
(Read our full coverage on this earnings report: Target Tops Consensus)
Agreement of Estimate Revisions
The agreement of estimate revisions indicates that the analysts were unidirectional following Target’s third-quarter 2011 results.
In the last 7 days, 6 out of 20 analysts covering the stock raised their estimates, whereas only 1 analyst lowered the same for the fourth quarter of 2011. For the first quarter of 2012, 3 analysts raised their estimates with only 1 analyst making downward revision in the estimate.
For fiscal 2011, 13 analysts moved their estimates up, with none revising the same downward in the last 7 days. For fiscal 2012, 10 analysts increased their estimates and only 2 analysts lowered the same.
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.
The Zacks Consensus Estimates moved up by a penny to $1.48 for the fourth quarter of 2011, and by a couple of cents to 97 cents for the first quarter of 2012, in the last 7 days.
For fiscal 2011, the Zacks Consensus Estimates jumped by 8 cents to $4.30, and for fiscal 2012 it climbed by 2 cents to $4.34 in the last 7 days.
What Drives Estimate Revisions
Clearly, a positive sentiment is palpable among analysts, who remain optimistic on Target’s performance. Following the earnings release, the Zacks Consensus Estimate has been on the rise with analysts remaining bullish on the stock. The better-than-expected results bolstered analysts’ confidence.
Management indicated that Target’s P-fresh remodel program and 5% REDcard Rewards program will help sustain the sales momentum, continue to drive traffic and enhanced customer shopping experience. Target in order to expand its global footprint is planning to enter the Canadian market in 2013. These were enough to cheer the analysts.
Target now projects fourth-quarter 2011 earnings between $1.43 and $1.53 per share. The analysts have a consensus on $1.49 for the respective quarter, which lies near the high-end of the guidance range.
Let’s Conclude
Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.
The company in order to entice customers is also providing an additional benefit of free shipping for any e-shopping to its cardholders, who are already getting 5% off for the purchases made.
Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in the international markets.
The greater concentration of Target’s revenue generating capability in a few regions of the United States, poses a competitive threat, compared to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), who are geographically more diversified and more resourceful.
Currently, we maintain our long-term ‘Neutral’ rating on the stock. However, Target holds a Zacks #2 Rank that translates into a short-term ‘Buy’ recommendation, and clearly defines the upward revision in the estimates.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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