Target Earnings Hit the Mark, Investors Not Impressed

Target (NYSE: TGT) released quarterly earnings on Wednesday, and the discount retail giant managed to meet profit expectations. Even better, Target beat analyst forecasts on both the top line and on comparable sales, a key figure for retailers that measures sales at locations open at least one year.
Despite its satisfactory operating results, investors reacted negatively to the Target earnings results and sent the stock 4.3% lower on a day in which the Dow Jones Industrial Average gained nearly 250 points. Target’s underperformance is confusing, since the company proved it has largely overcome the multitude of challenges that caused its stock price to fall from $70 in August 2013 to $55 by May 2014.
The good news is that Target remains a strong company and a high-quality dividend stock. If anything, the sell-off after earnings could be a good buying opportunity.

Earnings Are Right on Target

For the quarter, Target earned $0.86 per share, up 59% from $0.54 per share a share year-over-year. This matched Wall Street projections. Adjusted earnings rose 8%.
Revenue fell slightly, to $17.61 billion from $17.73 billion in the same quarter last year. Still, Target’s revenue beat analyst expectations, which called for just $17.57 billion. Same-store sales rose 1.9% last quarter, again exceeding estimates. Analysts had projected an increase of 1.8%.
Target has announced a number of initiatives in recent months to keep its momentum going. For example, last month it dropped the minimum purchase requirement for free shipping on online purchases.
Target also raised the low end of its full-year earnings guidance. The company now expects earnings of $4.65 to $4.75 per share for the current fiscal year. It had expected $4.60 to $4.75 per share in its previous forecast. This could imply the company foresees a better-than-expected holiday shopping season, which is a crucial period for retailers.

Turnaround Is Making Progress

Target’s earnings report showed the company is making progress in its turnaround. Investors may recall in late 2013 that as many as 70 million Target shoppers had their personal information stolen during the holiday shopping season. Hackers obtained data including payment card numbers, names, mailing addresses, phone numbers and email addresses. This caused significant erosion in the company’s brand image with consumers and suppressed sales for several quarters.
If that weren’t bad enough, Target then had to end its ambitious expansion in Canada that eventually ended in failure.
Target Canada was initially a success. Consumers enjoyed the novelty of the Target experience, and the company brought in shoppers through promotional activity associated with the stores’ grand openings. But this deep discounting resulted in big losses.
Target Canada lost $627 million before interest and taxes in its last three full quarters of operation. Once the promotional activity ended, shoppers didn’t return. This was clear from poor same-store sales numbers. In its final three quarters, Target Canada’s same-store sales declined 3.3% year-over-year. Such poor comparable sales, and the mounting operating losses, prompted Target to close all its stores in Canada.

Target May Be a Compelling Buying Opportunity

Target’s earnings report largely met or exceeded analyst expectations and the company showed it is very far along in its turnaround. The market may not have been pleased with the results, but for investors sitting on the sidelines, Target stock looks attractive.
Target offers a solid 3.2% dividend yield and has a proven track record of dividend growth. The company is a Dividend Aristocrat, having increased its payout for the last 41 years in a row. This is a very impressive streak of consecutive dividend raises that speaks to the consistency of the business model. Over the past five years, Target has lifted its payout by 17% per year.
Thanks to the sell-off, the stock now trades for 13 times forward earnings estimates. The stock is cheap and carries a high dividend yield. From the perspective of value and income investing, there is a lot to like about Target stock.

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