When Target (TGT, Financial) released its third quarter results on the November 19, it sent positive waves down the stock market making its stock move to a new record high after months of trailing in the negative territory. Indeed, it seemed as if the impact of the massive data breach which the retailer had reported in the holiday quarter of the previous year had just been wiped off spelling great news for Target’s future. The top and bottom line numbers clearly surpassed the analysts’ expectations and this was mainly influenced by improved sales in North America where Target urges to stay ahead of its immediate rival, Walmart (WMT, Financial). Let’s take a dive into the number mix reported in the third quarter and find out how the financial playbook of the retailer has gained strength through the quarter.
The glittering number set
Target reported $17.73 billion as third quarter revenue, up 2.8% from the same period last year. This was attributed to the 1.9% improvement in sales in the U.S. as customers seem to have forgiven Target for the data breach that happened last December and the revival of Canada sales which grew by a whopping 43.8% when compared to the previous year’s similar quarter. Revenue for the quarter beat analysts’ expectations that were standing at $17.56 billion for the quarter.
While overall sales seemed to be on an upsurge, the margins took a slight hit with gross margins coming to 29.2% of sales which represents a 50 basis points downturn compared to the year-ago. Absolute costs actually rose higher by 1.1% on an annual basis. However, as the effective tax rate fell to 31.2%, it aided the company in posting a modest 3.1% increase in net earnings which rose to $352 million. This resulted in earnings per share of $0.55 a share whereas Reuters’ analysts were expecting earnings of around $0.47 a share. Remarkably, the retailer had also forecasted earnings to be in the range of $0.40 a share to $0.50 a share, and the actual earnings beat the company’s forecast.
Segmental sales remain the bright spot
In the U.S., same store sales grew by 1.2% for Target whereas digital sales recorded a growth of over 30% in the quarter. Walmart in comparison managed just 0.5% comps in the fiscal third quarter – this does show the briskness in store sales being witnessed for Target, the second largest discount retail chain in the U.S.
Target had earlier forecasted same store sales to be flat at around 1% growth. But the U.S. revenue growth of 1.9% to $17.3 billion clearly outpaced the company guidance. This quarter’s growth marks a fresh start for Target, as it also saw a change in the top brass this summer when CEO Gregg Steinhafel resigned in the wake of the holiday season breach and Brian Cornell took over the top job.
During the earnings call, CEO Brian Cornell, stated, “We’re pleased with our third-quarter financial results, which were driven by better-than-expected performance in our U.S. Segment… We’re encouraged by the improving trend we’ve seen in our U.S. business throughout the year, and our fourth-quarter plans are designed to sustain this momentum.”
Though the retailer has only 133 stores in Canada, there was a rapid pace of top-line sales growth seen in Canada as well. Same store sales in this new and smaller region for the 1,934 store strong retailer increased 1.6% and things are really looking up in Canada where the retailer has been posting losses for the past few quarters.
Change in strategies have proved effective
Since the data breach episode which had taken a toll on its same store sales to a considerable extent, Target has taken strides to boost its image in the retail segment in the U.S. It has initiated recent strategies such as free shipping of online orders ahead of the holidays. The retailer has also implemented Apple Pay support into its mobile stores when the payments system got announced.
In August this year, the retailer teamed up with a marketing and analytics company to allow Instagram users to purchase items directly by clicking images in their feeds. Liking an image saved the featured item for a later purchase.
Such measures have helped the retailer to move out from the black patch created through the data breach incident into better shining days, which is well-apparent through the third quarter posted numbers.
Holiday quarter guidance is firm
Management’s earnings guidance for the fourth quarter is in line with the Street expectations and points to a solid holiday quarter in the competitive environment. Target forecasts earnings in the range of $1.13 per share to $1.23 per share for the fourth quarter, or just in line at the higher end of the range with the $1.22 per share that analysts are predicting.
CEO has reiterated that the company is confident on growing its sales further in the holiday season which should get positively impacted by free shipping of online ordered products which is a luring purchasing point for U.S. customers.
Final conclusion
Target seems to be back on track with respect to its financial numbers, and let’s hope that the data breach episode was a one-time affair for the company. With solid strategies in place and the U.S. segment going really strong, Target looks all set to drive its top and bottom lines even higher in the coming quarters. Let’s stay tuned!
