The truth is that I can not begin to tell you just how impressed I have become with Target (TGT) , Target CEO Brian Cornell, and the level of execution this firm has attained on a corporate level. Don't get me wrong. I am short the name, but that position was entered into in the pre-opening hours, after the earnings release. If readers have watched the interviews that I have done on a near weekly basis with Katherine Ross of TheStreet, they know that I took my profits in this name in the wake of the firm's second quarter earnings related gap higher. I did that with the intent of buying the position back on a discount that never materialized to a great enough degree.
Yes, as I write this missive, I am short. That is but a trade, as my thought is that the shares may have run too high in the early going. There is a very good chance that I end up long these shares prior to Black Friday. At least that's the plan. As we all know, everyone's plan changes once the first punch is thrown, so we'll see. That said... grab a shovel. It's time to dig in.
The Third Quarter
For the quarter just ended, Target reported adjusted EPS of $1.36, trouncing the Wall Street consensus view of $1.18. The firm posted revenue generation of $18.67 billion, also a beat, and good enough for year over year growth of 4.8%. It gets better. Comparable sales grew 4.5% for the quarter, well above the 3.5% that the industry was looking for. Digital sales (e-commerce) grew 31%, and now comprises 7.5% of total sales. Gross margin improved to 29.8% from 28.7%. Operating margin expanded from 4.6% to 5.4%.
Moving forward, Target now expects full year EPS to land in a range spanning $6.25 to $6.45. This is up from the firm's prior guidance of $5.90 to $6.20, and well above the analyst community's consensus expectation of $6.17. CEO Brian Cornell spoke on the firm's immediate future on Wednesday morning. "Looking ahead, we have ushered in the holiday season with an unwavering commitment to guest service that compliments our highly differentiated, value-driven assortment, our exceptional in-store shopping experience as well as an unmatched suite of easy and convenient fulfillment options." In plain language, ... They're killing it.
In a televised interview, also this morning, Cornell added, "Unemployment is low, wages are rising, consumer confidence is strong, and all the indicators right now would say we're looking at a very solid holiday season." Just hear those sleigh bells jingling, ring, ting, tingling. You know it's lovely weather.
On Wednesday morning, we learned that Target...
1) Beat on Earnings.
2) Beat on Revenue.
3) Crushed comparable sales.
4) Grew Digital sales nicely.
5) Improved margin performance.
6) Raised Guidance.
Other than that, not much to boast about.
While the market has rewarded growing sales across digital channels for nearly every retailer able to do so, most that can get this done do so at the expense of margin. Plain and simple. Sale prices tend to be lower in order to be competitive, and getting any package to any given street address increases overhead. Now, Target has been quite innovative here. Included in digital sales would be same day delivery, curbside pick-up, and in-store pick-up. Cornell stresses that while 80% of e-commerce sales require same day service, when the firm is able to fulfill from the back of a store instead of from a regional distribution center, the expense of shipping is reduced by a rough 40%. When customers pick up either at the curb or inside the store, the expense is reduced by 90%. This is where big data, and the ability to anticipate consumer needs comes in.
Readers will note the upside explosion to the upside created by the purple ascending triangle, not to mention Q2 earnings. There is some technical danger here to be honest. After this morning's opening surge, these shares now have not one, but two gaps that could fill. I addition, Relative Strength, which had moderated, is now way too high for me to grab any shares at this time. In fact, after I submit this piece I would think that I might add to my short.
That does not mean that I don't like Target. It just means that the shares are up in my mush, and I must admit, that's a challenge that I relish. I don't know where to get long these shares. Former resistance of $110 would be awesome. That level is also unrealistic (I think) before Black Friday, and I will be long these by then. I'll be flat TGT today.