Target (TGT - Get Report) surprised investors on Wednesday with second-quarter numbers that were brutal across the board. If not for heavy cost cutting the during the quarter, the company would have missed earnings. But that's something the Street picked up on and disregarded.
Target stock closed Wednesday down 6.4% to $70.63. The retailer reported a 1.1% decline in second-quarter same-store sales. Digital sales were up 16% but that marked a notable deceleration from prior quarters. Target says it's "prudent" to lower its outlook and now sees third-quarter earnings in the range of 75 cents to 95 cents a share while full-year EPS is $4.80 to $5.20, down from prior forecast of $5.20 to $5.40.
But it's not time to overreact. Target is not the only retailer to feel the effects of Amazon.com's (AMZN - Get Report) e-commerce dominance. It can fix its revenue struggles by tweaking its merchandising strategy. This makes Target stock a solid bargain for the next 12 to 18 months.
Looking deeper into the results, there were notable positives. For instance, despite the weak same-store sales, the company's average transactions were up 1.1% year over year. Although it suffered 1.5% decline in units per transaction, the average selling price per unit was up 2.6%. What does this mean? Customers are buying higher-ticket items, even though they're buying fewer things per visit.
Investors reacted the same way to Target's first-quarter results. I had recommended the stock at $68 then and was proven right. Since May shares have risen as much as 14%, reaching $77.38 on July 26. With the stock now at around $70, trading below all three key moving averages (20-day, 50-day and 100-day), TGT will reclaim its benchmark levels.
Despite what some believe is an eroding business strategy, there were enough positive aspects in Target's report to justify some patience. Purely from a risk-versus-reward perspective, TGT can still deliver gains of 5% to 10% before the year is over, especially as the all-important holiday shopping season approaches.