Should You Buy Target (TGT) Ahead of Its Q4 Earnings?

Target Corporation (TGT) is scheduled to report its fourth-quarter and full-year results on March 5. Wall Street expects the company to post higher quarterly earnings and revenue over the prior-year period. In this piece, I have discussed why it could be wise to buy the stock now.

For the fourth quarter, TGT’s EPS and revenue are expected to increase 27.7% and 1.5% year-over-year to $2.41 and $31.87 billion, respectively. The company has a stellar earnings surprise history, having beaten the consensus EPS estimates in each of the trailing four quarters.

During the third quarter, TGT’s operating income margin stood at 5.2%, indicating an increase of 1.3 percentage points, driven by a higher gross margin rate. Its inventory at the end of the third quarter was 14% lower than last year, reflecting a 19% reduction in discretionary category inventory.

TGT’s chair and chief executive, Brian Cornell, said, “In the third quarter, our team continued to successfully navigate our business through a very challenging external environment. While third-quarter sales were consistent with our expectations, earnings per share came in far ahead of our forecast.”

“This profit performance benefited from our team’s commitment to efficiency and disciplined inventory management, and I’d like to thank them for their tireless efforts. Looking ahead, we’re continuing to make investments throughout our business – in our assortment, our team and the services we offer – to provide the newness, affordability and convenience our guests want during the holiday season and beyond,” he added.

For the fourth quarter, TGT guided for its adjusted EPS to come between $1.90 and $2.60. The retailer expects its comparable sales for the fourth quarter to decline in the mid-single digits.

Also, with 2023 being a 53-week year, the fourth quarter will include an extra week of sales and profits. The extra week is expected to add about $1.7 billion in sales, resulting in nearly 30 basis points of operating margin rate leverage in the quarter. The company had said that it would offer 10,000 new items during the holidays, with thousands of must-have gifts under $25 and thousands of exclusive-to-Target items across various categories.

At the end of the third quarter, TGT had said it was on track to invest $5 billion in the business and had plans to open 21 new stores last year. More than 150 stores would have received complete remodels or other enhancements in 2023.

Goldman Sachs analyst Kate McShane has a Buy rating on TGT with a 12-month price target of $176. Similarly, UBS has maintained a Buy rating on the stock with a $174 price target.

TGT’s stock has gained 15.7% over the past three months and 24.8% over the past six months to close the last trading session at $151.99.

Here’s what you might want to consider ahead of its upcoming earnings:

Mixed Financials

TGT’s total revenue for the fiscal third quarter that ended October 28, 2023, decreased 4.2% year-over-year to $25.40 billion. However, its operating income rose 28.9% over the prior-year quarter to $1.32 billion. The company’s net earnings increased 36.3% year-over-year to $971 million.

In addition, the big-box retailer’s EBITDA rose 20.9% over the prior-year quarter to $2.06 billion. Also, its adjusted EPS came in at $2.10, representing an increase of 36.4% year-over-year.

Mixed Analyst Estimates

Analysts expect TGT’s EPS for fiscal 2024 and 2025 to increase 38.9% and 9.3% year-over-year to $8.36 and $9.14, respectively. On the other hand, the company’s fiscal 2024 and 2025 revenue are expected to decline 1.8% and 0.5% year-over-year to $107.20 billion and $106.68 billion, respectively.

Attractive Profitability

In terms of the trailing-12-month net income margin, TGT’s 3.40% is 30% lower than the 4.86% industry average. Likewise, its 2.08% trailing-12-month levered FCF margin is 54.3% lower than the industry average of 4.55%. Furthermore, its 7.44% trailing-12-month EBITDA margin is 36.3% lower than the industry average of 11.69%.

Discounted Valuation

In terms of forward non-GAAP PEG, TGT’s 1.30x is 41.8% lower than the 2.23x industry average. Its 10.85x forward EV/EBITDA is 4.2% lower than the 11.32x industry average. Likewise, the stock’s 0.65x forward Price/Sales is 44.1% lower than the 1.17x industry average.

POWR Ratings Show Promise

TGT has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TGT has a B grade for Value, consistent with its low valuation. The stock is trading above its 50-day and 200-day moving averages, $142.83 and $130.84, respectively, justifying its B grade for Momentum.

TGT is ranked #21 out of 38 stocks in the Grocery/Big Box Retailers industry. Click here to access TGT’s Growth, Stability, Sentiment, and Quality ratings.

Bottom Line

Despite a challenging macroeconomic environment, where discretionary sales have remained soft, TGT has managed to register a significant improvement in operating income and overall profitability compared to the previous year through optimizing its inventory position.

The company is investing in new stores, enhancing its digital capabilities, and providing newness, affordability, and convenience to its customers. With inflation showing signs of easing and the central bank likely to cut interest rates this year, TGT could stand to benefit significantly. It has several key long-term investments lined up, which will drive top-line growth.

Given its appealing valuation, robust profitability, and promising growth outlook, it could be wise to buy the stock now.

How Does Target Corporation (TGT) Stack Up Against Its Peers?

While TGT has an overall grade of B, equating to a Buy rating, you may also check out these other A (Strong Buy) or B (Buy)-rated stocks within the Grocery/Big Box Retailers industry: Ryohin Keikaku Co., Ltd. (RYKKY), Walmart Inc. (WMT), and Empire Company Limited (EMLAF).

To explore more retailer stocks, click here.

What To Do Next?

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TGT shares rose $0.16 (+0.11%) in premarket trading Wednesday. Year-to-date, TGT has gained 8.38%, versus a 6.65% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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