While recent retail earnings calls have been dancing around the topics of tariffs and weather headwinds, it seems neither can temper the optimism after Target's (TGT) stellar quarter.
Shares of the midwest-based retailer are soaring by the largest percentage in the stock's history touching triple digits for the first time ever. Not too shabby.
Tariff Trouble Ahead?
The main worry heading into the quarter was conservatism on behalf of management as a new slate of tariffs comes into play.
But after a raised guidance and noted margin expansion to bookend the blockbuster earnings beat, even that concern appears unfounded.
"We're mindful of the volatility and uncertainty in the marketplace, including the timing and extent of additional China tariffs," CEO Brian Cornell acknowledged. "As long as the trade situation remains fluid, it will present an additional layer of uncertainty and complexity as we plan our business."
However, he added that the delay until the December saving holiday shopping and cushioning the coming quarter, guidance remains solid. Further, the company's diverse product lines and ability to push back on suppliers should sustain the stock's momentum even when those tariffs appear.
"We expect to continue to benefit from our diverse, multi-category assortment, deep expertise in global sourcing and a sophisticated set of manufacturing partners around the world," Cornell clarified. "As a result, we are confident in our ability to navigate this period of heightened volatility and move our business forward.
As far as the execution of this strategy, there is little reason to doubt Cornell's aptitude from a historical standpoint. Indeed, if Cornell was being conservative, there might be much more upside ahead.
Unlike Target, Kohl's saw comp sales fall below estimates, decelerating sharply for the second straight quarter. And, for the second straight quarter, this was largely blamed on weather troubles that kept consumers out of stores.
This didn't appear to cause Target to miss the bulls-eye at all.
"We were particularly pleased to see such strong trends at Target despite unfavorable weather trends during the quarter and soft sales condition for the overall industry," Cornell said. "We saw some unusually strong share gains across multiple parts of the Apparel assortment in the second quarter."
Target saw same store sales increase over 3% and foot traffic jump as well, driven by online pickup that brought more consumers into physical locations. That is not to mention the delivery options that were credited with generating a lion's share of sales digitally.
With that in mind, it would appear that it is Target's execution and product offerings that are accelerating the bifurcation between the retailers, not the idea that one is somehow operating stores in the sunny part of town.
Part of that is indeed location, with Target operating generally away from malls or strip malls in standalone locations, but also in the remodeling of stores to cater to young consumers eager to conveniently and quickly bargain hunt.
"We completed 84 remodels in the second quarter, and we're on track to deliver approximately 300 this year," Cornell said. "These projects transform the shopping environment, featuring end-to-end improvements in our decor, lighting and merchandise displays. In addition, they incorporate changes to optimize digital fulfillment, enabling speed and reliability for our guests and efficiency in support of our financial performance."
Cornell said as much, arguing that the factor that sets Target apart from the rest of the retail field is its execution and willingness to invest in winning digital strategies and store remodels.
"The investments we're making new small formats continue to perform very well, as we continue to scale and mature our suite of fulfillment options, " he added. "We continue to see great reaction to both our own brands and our national brain performance, but I think our team was just focus on executing our plan each and every day, and I think it ended up with a very strong quarterly success."
For investors, this begs the question as to whether the weather is a viable excuse or if it is really down to location and digital leverage.
After a slew of earnings reports, the tape appears to be leaning towards the latter.
Re-Rating in Retail
With Target continuing to separate itself from the field, leading to its massive surge on Wednesday, the question that comes to the forefront is over how much upside remains.
"Target delivered very strong Q2 results, which should be viewed even more positively in light of mixed industry trends and weaker results at many of its peers," Credit Suisse analyst Seth Sigman concluded. "This should serve as a catalyst for some level of re-rating on this stock."
On that note, numerous analysts have raised price targets on the stock. While consensus targets remain hovering around $100 per share, per FactSet, indicating it might not be the best idea to chase, any pullbacks in coming days could be pivotal opportunities.
For more on where the charts are forecasting entry points, click here.