I called this one last week, saying I expected Target (TGT) to be one of the stars of retail this week. No, I'm not Nostradamus. It wasn't hard to predict considering Target reported its comp sales increases for November/December a while ago. Target closed out the year with 5% same store sales growth for 2018.
The growth rates read like a gem. Comparable sales for the fourth quarter grew 5.3% while the stores' traffic rates increased 4.5%. This is not a stat to be overlooked. Retailers that succeed are the ones that are successfully bringing new customers into their stores rather than relying solely on transaction values. The retailer also did well in the digital space. Comparable store sales increased 2.9% while digital sales increased a whopping 31%. The key here in how the business is complementing itself lies in how it makes use of digital sales. Almost 75% of Target's digital sales were filled at its stores. This helps draw in traffic.
The year as a whole was great. Comp sales grew 5% with comparable store sales up 3.2%. The digital space is easily the fastest growing piece of the business, with full year digital growth of 36%. Beating estimates, Target reported full year GAAP earnings of $5.50 per share with adjusted earnings of $5.39 per share. The full year results read much better than the fourth quarter, which had unadjusted earnings of $1.52, marking a 23.5% decline year over year. Adjusted earnings were $1.53, which while beating estimates certainly isn't that much better. As a whole, we'll need to see a little better performance here, but the year was still exceptional.
For 2019, Target provided guidance that includes continued comp sales growth in the single digit range along with increases in operating income. I wrote before about how I wanted to see improving operating income from the retailer, and this forecast makes me happy. Of course we'll have to wait and see if it actually happens. Target's guidance on earnings is $5.75 to $6.05 on both a GAAP and adjusted basis. If the company hits the high end of that guidance, it would give the stock a forward P/E of roughly 12.5. That's not bad considering the 3.37% dividend and generally improving trends of the company.
Target is one of the names that has adapted very well in the shifting retail landscape. It revamped stores, built up a digital presence, and used that digital presence to compliment the success of its brick and mortar base. I really can't say too many negative things here. I could fault the fourth quarter earnings on a year over year basis, but it's difficult considering the difference in taxes. Pretax income for the fourth quarter of $1.014 billion was actually flat relative to $1.012 billion in 2017. The big difference here was taxes. In 2017 the company enjoyed a tax benefit of $76 million whereas they paid $216 million in taxes in the fourth quarter of 2018 (or provisioned $216 million).
There's simply not much to complain about here. Target had a good 2018. If I had to make a complaint, cash flow could be better. Overall I like the stock at current prices. I think this is a good value play on retail in brick and mortar as well as the digital side of things.