Why Target Stock Is Lower After Earnings Beat

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Target  (TGT) - Get Report posted a strong holiday quarter, compared to the revised guidance the company issued in mid-January. The stock didn’t react much, as investors are still shaken by the slightly lowered same-store-sales growth number seen in the quarter.

The stock fell 0.66% Tuesday to $108.30 a share. The stock was down 13% for the year heading into earnings and Real Money's Bruce Kamich noted that shares were already showing signs of weakness. 

Management had pronounced January 15 that the company would see 1.5% same-store-sales growth in the quarter, lower than the previously expected 3% growth, as toy sales and other categories disappointed for the holiday.

Here were the results:

Earnings per share: $1.69 v. $1.65 expected

Revenue: $23.4 billion v. $23.5 billion

Same-store-sales: 1.5% v. 1.5%

Two parts of the quarter were solid, making at least one analyst encouraged.

First off, management said its past investments in digital sales are paying off, as digital at large grew 20% year-over-year. About 80% of the roughly $4.68 billion in digital sales were from same-day delivery, which Target offers through Shipt and buy-on-line-pick-up-in-store (BOPIS). 

Some investors were worried target was losing to Amazon  (AMZN) - Get Report, but the digital sales efforts refute that.

But here’s the kicker:

Target’s financial results look to be back on track to those that drove the stock up 90% in all of 2019.

Management said the digital efforts will see same-store-sales growth in the low to mid single digits in percentage terms for full year 2020. 

Earnings per share is still expected at a mid range of $6.85. Margins stayed in shape, with the operating margin remaining above 5%, partly driven by cost discipline in selling, general and administrative, even as the company continued its strong rate of marketing spend.

Investors want to see hard proof that same-store-sales growth will move back to 3%, as management says it will, a dynamic that is holding shares back. Currently, the stock trades at under 16 times next year’s earnings, as Target also continues to aggressively growth capital expenditures and marketing spend, pressuring free cash flow, which is looking to decline slightly for the calendar year 2020. Compared to Walmart, analysts note, the stock should trade closer to 20 times. 

According to Goldman Sachs analyst Kate McShane, “We are encouraged by today’s guidance and think the stock could be flat to up depending on the tone of the meeting [investors meeting].

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