Retail giant Target Corp. (TGT) reported third quarter financial results on Wednesday morning, just a day after chief rival Walmart (WMT) did the same. For the period reported, Target posted adjusted EPS of $3.03 (+8.6%), and GAAP EPS of $3.04. Using either metric, the firm easily beat the consensus view for profitability. The firm generated $25.65B in revenue over the three months, which beat Wall Street by more than a cool $1B, and was good enough for growth of 13.3% over Q3 2020.
Company-wide comparable sales increased 12.7%, which crushed expectations for just 8.4%. Store comparable sales increased 9.7%, while digital comparable sales popped 29%. Within that data, Target's same day service, which includes curbside pickup, drive up, in-store retrieval, and home delivery, increased 60%. Incredibly, more than 95% of third quarter sales were fulfilled by the firm's stores.
So, why are the shares trading lower in response? It comes down to this. Gross margin for Q3 2021 printed at 28.0%, down from 30.6% for Q3 2020. Never mind that gross margin for the first nine months of 2021 landed at 29.5%, up from 29.1% for the first nine months of 2020. CEO Brain Cornell, who has just done a fabulous job with this company, owned the margin compression, and so there we are.
In a call with the media on Wednesday morning, Cornell acknowledged that the company is absorbing some higher costs, rather than passing it on to consumers. Cornell said, "We are protecting process. It's as important to our guests this year as safety has been throughout the pandemic." The firm sees eating some inflation so that its customers don't have to bear the full brunt of higher prices as an investment in future market share.
On the current quarter, Cornell said, "With a strong inventory position heading into the peak of the holiday season, our team and our business are ready to serve our guests and poised to deliver continued strong growth through the holiday season and beyond."
Cash and cash equivalents are significantly lower than they were nine months ago. As we have seen with other key retailers, that value has been transferred into inventories. All in all, current assets are up almost $2B over these nine months, but now stand in value below current assets, which was not the case in January. This has to do with growth in the entry for accounts payable, and is directly reflective of the inventory build, and probably to a degree, the reduced gross margin. Total assets are still comfortably larger than total liabilities less equity. Long-term debt is level with nine months ago, and actually down from a year ago. As I told you in regards to Home Depot (HD) yesterday, I don't love the balance sheet, but it passes.
For Q4 2021, Target expects to see high single digit to low double digit growth in comparable sales, up from previous guidance for high single digit growth. The firm also sees an operating income margin of 8% or higher. This compares to 7.8% for the quarter just reported.
I have not seen much of a reaction by Wall Street's community of analysts so far on Wednesday. Over the past month, two five star (TipRanks) analysts have opined on Target. Christopher Horvers of JP Morgan and Kate McShane of Goldman both rate Target as their firm's equivalent of a "buy" while running with price targets of $310 and $308, respectively.
As readers will see, this morning's selloff interrupted what had started to look like a breakout from a cup with handle pattern with a $262 pivot. Both Relative Strength and the Full Stochastics Oscillator appear rather neutral at the moment. As for the daily MACD, both the 12 day and 26 day EMAs are extended, but the nine day EMA stands in negative territory. This will pull the 12 day below the 26 day and send a bearish signal to the algorithms that track such things.
I am long the name, but not especially eager to buy the shares up here, even down more than 5% for the day. I'm still up 44%. I would however, if not already long, probably see value in buying the shares from the last sale down to the 50 day EMA at $245. The unfilled gap created this morning, as well as the firm's strategic plan around gross margin that really does not impact operating margin all that hard leads me to believe that we are potentially not done with this pivot point.
I am currently eyeing November 19th TGT $245 puts at $0.80 and December 17th TGT $240 puts at $2.65 for potential short sales.