Target's Conservative Near-Term Guidance Is Necessary For Long-Term Sustainability

Target Corporation TGT reported its EPS for fourth-quarter 2016 below the estimate and the consensus, with the comp also missing expectations.

UBS’ Michael Lasser maintains a Neutral rating on the company, with a price target of $72.

Q4 Results

Target’s EPS for Q4 came in at $1.45, with a comp decrease of 1.5 percent, both metrics missing the estimates and the consensus. The comp came in at the low end of the company’s pre-released holiday guidance.

“On a 2-year stack, it represents a -130 bps sequential deceleration. Its store contribution to its comp was -3.3 percent, which was partially offset by a 1.8 percent contribution from digital,” the analyst mentioned.

Although Q4 was expected to be challenging, Target hinted that it intended to make meaningful investments to improve the company’s business model, given the evolving competitive environment. Lasser believes that this would be a “prudent step.”

“Its actions include adding to both its physical & digital assets, launching 12+ new brands, and investing in its gross margin,” the analyst elaborated.

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Long-Term Steps

Target provided a conservative guidance for FY17. Lasser believes that such steps are required to better position the company to compete more efficiently in an “evolving retail environment” in the long term.

The adjusted operating margin for Q4 2016 came in at 6.5 percent, beating the consensus and reflecting that Target was no immune to the promotional environment seen during the quarter, although it managed its SG&A well.

The gross margin for the quarter contracted 95 bps to 26.9 percent, again beating the consensus and the estimate, driven by markdown pressure due to promotional and clearance activity, as well as costs associated with a mix shift to digital, partly offset by benefits from the pharmacy & clinic sale, a favorable mix and COGS (cost of goods sold) savings.

Target guided to EPS of $3.80–$4.20 for FY 2017, driven by a low single digit comp decline. For Q1, the company guided to EPS of $0.80–$1.00, missing the estimate.

At last check, shares of Target were down 12.6 percent at $58.80.