Target Reported Earnings and Now It's Valued on Par With Walmart

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Target  (TGT) - Get Report shares fell after the company reported a far better-than-expected first quarter for the calendar year of 2020. But the story for Target now stretches far beyond just this quarter. 

The stock fell as much as 2% after Wednesday morning’s earnings, which beat expectations. The stock had run up 11% for the month of May into the earnings print. 

Huge investments to support consumers’ mad-dash for groceries and essentials ate into Target’s profits as expected, but the company was still able to beat both sales and earnings expectations, handily. And the company used its new-found strength in digital sales, coordinated with its stores, to do so. 

The stock was priced for perfection, but is now trading at a valuation blush analysts have been pushing investors to see for years. 

Here were the results versus Wall Street estimates:

  • Revenue: $19.62B v. $19.02B (actual: +11% year-over-year)
  • Same-store-sales: +10.8% v. 7.6%
  • Earnings Per Share: 59 cents v. 38 cents (-61% year-over-year)

Digital sales rose 141%, comprising 9.9% of same-store-sales, ahead of schedule, as the company and analysts had expected that portion of sales a few years from 2020. Of course, when the Coronavirus tailwind fades, the company’s operate model will normalize. Target has gotten efficient at using its stores as fulfilling centers for digital purchases and coordinating the two sales channels. 

Same-day delivery rose 278%, signifying Target is more than competitive with Walmart  (WMT) - Get Report and Amazon  (AMZN) - Get Report in the one area any retailer needs to execute with strength in order to stay competitive. These initiatives will help Target grow same-store-sales in the 2% to 3% range, normal for a healthy retailer weighted towards consumer staples. 

As for the earnings contraction, which was less severe than expected, Target poured hundreds of millions of dollars into safety and health expenses. Plus, supply chain and digital costs soared. Investors expect earnings to decline and sales to surge for the year. 

The company withheld guidance, as uncertainty over how long the strange operating environment will last in the face of lockdowns. 

But as the stock has run up 31% from its March 25 2020 low, investors have continued to recognize Target’s strengths, which lagged Walmart’s for years. Analysts fully expect Target’s operating margin to expand to close to 6% for the long-term, according to data from FactSet. 

Walmart’s margin is likely to stay at around 4%. Target, after having traded at a discounted earnings multiple to Walmart’s, is now trading at 22 times next year’s earnings. That’s where Walmart has traded for the past several years, although investors have recently been paying a pandemic premium to own Walmart’s predictable, staples-driven earnings stream. 

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