Target Q3 Earnings Surpass Estimates On Upbeat U.S. Sales

Target Corporation (TGT - Analyst Report) posted third-quarter fiscal 2014 results, wherein adjusted earnings of 54 cents a share surpassed the Zacks Consensus Estimate of 47 cents on the back of better-than-expected U.S. sales and improved performance on the Canadian turf.

This gives a positive signal just before the busiest season of the year and sent the shares of this Zacks Rank #3 (Hold) company up roughly 3% during pre-market trading hours. It seems that Target is gradually emerging from the massive data breach that hit it in the last holiday season.

Target has been trying hard to improve traffic count at its domestic stores and strengthen its position in Canada with sound marketing and merchandising initiatives. Additionally, with Brian Cornell being elected as the Chief Executive Officer and Chairman, management is hopeful of battling near-term headwinds and transforming Target into a leading omni-channel retailer.

However, earnings per share did decline 2.9% year-over-year due to increase in cost of sales and higher depreciation and amortization.

Let’s Unveil the Picture

Total sales increased 2.8% to $17,732 million from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $17,529 million. Sales for the U.S. segment came in at $17,254 million, up 1.9% year over year. 

Minneapolis-based Target’s comparable-store sales for the quarter increased 1.2% against 0.9% growth registered in the prior-year quarter. The number of transactions edged down 0.4%, though the average transaction amount climbed 1.6%.

Gross profit at the U.S. segment inched up 0.2% to $5,083 million, while gross margin contracted 50 basis points to 29.5% due to higher promotions. Segment operating income fell 5.2% to $927 million, whereas operating margin contracted 40 basis points to 5.4%.

Target’s credit card penetration increased 30 basis points to 9.8%, whereas debit card penetration expanded 80 basis points to 11.2% during the quarter. Total REDcard penetration climbed to 21% from 19.9% in the year-ago quarter.

We believe Target’s P-fresh remodel program, 5% REDcard Rewards program and Price Match strategy will help in augmenting sales.

Sales generated from the Canadian market during the quarter were $479 million, up substantially from $333 million in the prior-year period. Comparable-store sales jumped 1.6% in the quarter.

Gross profit at the Canadian segment soared 89.6% to $93 million, whereas gross margin expanded to 19.5% from 14.8% due to clearance of inventory.

Target’s credit and debit cards penetration in Canada came in at 1.9% and 2.3%, up 50 basis points and 80 basis points, respectively. Total REDcard penetration came in at 4.2% compared with 2.9% in the prior-year period.

Other Financial Details

During the quarter, Target did not repurchase any shares but paid dividends of $330 million, up 21.4% year over year. The company ended the quarter with cash and cash equivalents of $780 million, long-term debt and other borrowings of $13,809 million and shareholders’ equity of $16,373 million.

Stores Update

Target, which competes with Costco Wholesale Corp. (COST - Analyst Report), Sears Holdings Corporation and Wal-Mart Stores Inc. (WMT - Analyst Report), currently operates 1,801 stores in the United States, of which 1,294 are expanded grocery assortment, 249 are general merchandise stores, 249 are SuperTarget stores, 8 are CityTarget stores and 1 is a TargetExpress store. In Canada, the company operates 133 general merchandise stores.

Peek into Guidance

Target now projects adjusted earnings in the range of $1.13 to $1.23 per share for the fourth quarter and between $3.15 and $3.25 per share for fiscal 2014. Earlier, the company had projected earnings in the band of $3.10 to $3.30 per share for the full year.

The current Zacks Consensus Estimate for the fourth quarter and fiscal 2014 are $1.24 and $3.16, respectively.

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