Target Corp. TGT may have disappointed investors to an extent with its third-quarter fiscal 2015 performance. However, this does not mean that the general merchandise retailer is devoid of sound fundamentals. In fact, it could prove to be a healthy investment opportunity in the near term. Let’s identify the pros and cons embedded in the stock to reach a conclusion.
What Make Investors Cautious?
After four straight quarters of positive earnings surprises, Target’s third-quarter fiscal 2015 earnings of 86 cents per share came in line with the Zacks Consensus Estimate and grew 8.6% year over year, backed by higher traffic and sturdy sales in signature categories. On the other hand, total sales increased but missed the Zacks Consensus Estimate, after two successive quarters of revenue beat in fiscal 2015.
In the third quarter, the company generated total sales of $17,613 million that came in below the Zacks Consensus Estimate of $17,632 million. Moreover, the rate of sales growth decelerated 70 basis points sequentially to 2.1%. Management also pointed out that digital sales growth of 20% fell short of the company’s projection of a 30% jump. Moreover, we observe that the pace of growth in comparable-store sales slowed to 1.9% in the third quarter from 2.4% and 2.3% in the second and first quarters of fiscal 2015, respectively.
Hidden Catalysts in the Stock
Target is aggressively redefining itself amid an ever-changing and competitive retail landscape. The company announced certain strategic measures with a clear vision to put itself on the growth trajectory. Target’s initiatives, including the development of omni-channel capacities, diversification and localization of assortments, along with emphasis on smaller format stores, bode well. The company has also adopted an aggressive cost-reduction strategy.
Target discontinued its Canadian operations after a comprehensive evaluation. This enabled the company to deploy resources solely in the domestic markets and focus on developing its omnichannel capacities. The company is also adding more products to its online assortment. It further intends to invest in merchandise categories such as Style, Baby, Kids and Wellness.
Zacks Rank
Target currently carries a Zacks Rank #3 (Hold). Investors interested in the retail space may consider better-ranked stocks such as Abercrombie & Fitch Co. ANF, sporting a Zacks Rank #1, Foot Locker, Inc. FL and Express Inc. EXPR, both carrying a Zacks Rank #2 (Buy).
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