Target sales, earnings top Wall Street forecasts as traffic improves; raises guidance

Target blows past earnings estimates
Target blows past earnings estimates

Target on Wednesday topped Wall Street's sales and earnings estimates, thanks to improved traffic and sales trends that helped power its profits. In response to the stronger-than-expected results, the discounter raised its fourth-quarter sales and full-year earnings forecast.

The company's shares shot nearly 9 percent higher, to $77.51, in premarket trading.

Target earned $1.04 per share, adjusted, in the fiscal third quarter, on sales of $16.44 billion. Analysts had expected the company to report earnings of 83 cents a share on $16.3 billion in revenue, according to Thomson Reuters. In the prior-year period, Target earned 86 cents a share on sales of $17.61 billion.

The adjusted figure excludes a favorable resolution of income tax matters, losses on the early retirement of debt, and items related to the sale of its pharmacy business. The company also bought back $878 million in shares during the period.

"We are very pleased with our third quarter financial results, which reflect meaningful improvement in our traffic and sales trends and much stronger-than-expected profitability," said Target CEO Brian Cornell.

He added that "favorable gross margin mix and efficient execution" drove its third quarter earnings per share performance well beyond its guidance. "We also continued to gain market share in key signature categories (baby, style, kids and wellness) and saw unexpectedly strong sales in the back-to-school and back-to-college season."

As a result, Target raised its expectations for its fiscal fourth-quarter comparable sales, and for its full-year earnings results. The retailer now expects its holiday quarter same-store sales to come in between -1 percent and 1 percent, compared with -2 percent to flat, previously.

It predicts full-year adjusted earnings per share will come in between $5.10 and $5.30, compared with its prior forecast of $4.80 to $5.20. That forecast excludes early debt-retirement losses and a small benefit from the resolution of income tax matters.

"As we move into the biggest quarter of the year, we are pleased with our inventory position and confident that our team will deliver a great guest experience as they bring our merchandising and marketing plans to life throughout the holiday season," Cornell said.

Despite the better than expected results, the company's topline continued to take a hit, following the sale of its pharmacy business to CVS in December. Revenue declined 6.7 percent to $16.4 billion, in part because of that sale. But the company also experienced its second-straight quarterly drop in same-store sales, with that metric declining 0.2 percent.

That was better than analysts were expecting, as a FactSet estimate forecasted a 1 percent drop. The company's same-store sales snapped a two-year winning streak in the prior three-month period, as it struggled to bring shoppers into its stores — particularly on smaller "fill-in" trips that lead to repeat visits.

Even as the company's traffic showed a modest improvement from the second quarter, the number of transactions — often used as a proxy for store visits — declined 1.2 percent. To correct this problem, the company has said it will focus more of its marketing and in-store displays on value.

During the third quarter, that meant upping the amount of weekly ads that focused on grocery and essentials. Looking ahead, it includes a 20 percent increase in the amount of advertising that will focus on price this holiday season.

"Target is moving very slowly in the right direction," Neil Saunders, CEO of Conlumino research firm, told investors.

Target's digital sales posted another quarter of strong growth during the third quarter, with comparable online sales accelerating from the prior quarter and rising 26 percent. During the holiday period, Target will once again lean on its blanket free shipping offer to drive sales. This promotion eliminates the minimum spending threshold shoppers typically need to meet to receive their online orders for free.

It will also ramp up its exclusive toy offerings by 15 percent, to 1,800. And to kick off its Black Friday sale, Target stores will once again open at 6 p.m. Thanksgiving Day.

The retailer's management team has seen a number of changes over the past few months, including the exit of its chief digital officer and senior vice president of merchandising. A slow-going overhaul of its grocery department has also weighed on the retailer's results.