The Street Reacts To Target's Q4 Earnings, Analyst Day

Target Corporation TGT followed up its fourth-quarter earnings report Tuesday with an analyst day presentation, which garnered a mixed reaction.

Reasonable Earnings Growth Outlook

One of the key highlights from Target's earnings report is 31-percent growth in digital sales and the segment now accounts for 10 percent of total sales, KeyBanc Capital Markets' Edward Yruma said in a research report.

The company's investments in equipping stores to ship online orders have resulted in fulfillment costs that are more than 40 percent cheaper per unit on average while order pickup and drive-up.

Yruma said part of Target's top-line growth in 2018 can be attributed to better than expected performance in toys and baby segment at the expense of its rival retailers. Looking forward, Target's compelling portfolio of private label brands should help drive comp performance in the short to medium-term.

Management also presented investors a long-term financial outlook including a low-single digit comp growth, 10 basis points of D&A leveraged, ongoing stock buybacks to support earnings growth. A high-single digit earnings per share growth looks "reasonable" as the company established a proven track record of demonstrating returns on initiatives and investments.

Yruma maintains an Overweight rating on Target with a $110 price target.

Mix Of Sales Matters Most

Target's guidance for margin expansion in fiscal 2020 is based on a shift in both product mix and digital fulfillment, BMO Capital Market's Kelly Bania said in a research report. Guidance also assumes a move away from lower-margin toys and baby products, which accounted for an "outsized" driver of growth.

Bania said the problem for Target is the strategy of changing its sales mix strategy can result in unpredictability in sales from both in-store and online. As such, it would be difficult to model the company's margins outlook.

Bania maintains at Market Perform, with a price target lifted from $70 to $78.

'Significant Upside' Potential

Target is among the few retailers that continue showing investors strong sales trends, Tigress Financial Partners' Ivan Feinseth said in his daily newsletter. This is evident in the fourth-quarter report, which showed in-store and e-commerce sales gains along with a "significant" increase in ticket size and transactions.

Target continues to boast a differentiated and unique product assortment that offers value and connects well with consumers. This justifies a continued bullish stance on the stock which has the potential for "significant upside" from current levels.

Price Action

Target's stock closed Wednesday's session at $76.90 per share. The stock is up about 16 percent year to date.

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