Target (NYSE: TGT) is scheduled to report its fiscal fourth-quarter results on Tuesday, March 2. We expect Target to likely beat revenue and earnings expectations, driven by a boost in products related to in-home activities, such as home office and entertainment needs. In 2020, Target has shown that its brick-and-mortar stores have a place in the future of retail, and it’s leveraging that position to add more convenient online alternatives. The retailer invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt, all this while leveraging its brick-and-mortar stores – resulting in a stellar 217% growth in same-day services in Q3. We expect the company to ride on this growth momentum in Q4 as well.
Our forecast indicates that Target’s valuation is around $189 a share, which is 3% higher than the current market price of around $183. Look at our interactive dashboard analysis on Target’s Pre-Earnings: What To Expect in Q4? for more details.
(1) Revenues expected to be slightly ahead of consensus estimates
Trefis estimates Target’s Q4 2020 revenues to be around $27.6 Bil, marginally ahead of the consensus estimate. The Covid-19 crisis boosted sales of essential products at both Target’s online and brick-and-mortar stores. Consequently, the retailer’s revenue grew 19% year-over-year (y-o-y) in the first three quarters of the year. In Q1, its total comparable sales jumped 10.8% and its digital comps grew 141%. For Q2, its total comps rose 24.3% as its digital comps surged 195%. This trend continued in Q3 as well, where comps jumped 20.7% as its online comps grew 155%. Around 95% of digital orders were fulfilled in stores in the third quarter, providing a cost-effective approach to e-commerce that allows the company to make a profit from strong ordering.
2) EPS also likely to be comfortably ahead of consensus estimates
Target’s Q4 2020 earnings per share is expected to be $2.78 per Trefis analysis, almost 9% above the consensus estimate of $2.54. While the retailer saw incremental Covid expenses so far for the 2020 year, due to special bonuses to hourly employees, higher wages in fulfillment centers, and an exponential increase in digital sales during the first nine months of fiscal 2020, its stronger revenue growth helped to offset those expenses. Consequently, the retailer’s diluted EPS jumped 25% during this period.
For the full-year, we expect Target’s adjusted net margin to grow 90 basis points to 5.1% in fiscal 2020. This coupled with a 19% y-o-y growth in Target’s revenues, could lead to a rise of $1.4 billion y-o-y in adjusted net income to $4.7 billion in 2020. All this, resulting in a possible adjusted EPS increase from $6.40 in FY 2019 to around $9.33 in FY 2020.
(3) Stock price estimate slightly higher than the current market price
Going by our Target’s Valuation, with an adjusted EPS estimate of around $9.33 and P/E multiple of 20.3x in fiscal 2020, this translates into a price of $189, which is 3% ahead of the current market price of roughly $183.
Target has been able to adapt to a new normal and could thrive going forward – given that people are getting back to work and the economy is starting to pick up again. The retailer is stepping up its offering by making fresh and frozen groceries available through Order Pickup and Drive Up. In addition, as shoppers return to their usual buying habits, there could be a surge in Target’s sales in apparel and other higher-margin discretionary categories, as well. Target’s discounted prices and private-label brands (that differentiate it from Amazon
While TGT stock may trade higher post the Q4 release, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Target vs. Atlas Air Worldwide Holdings shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.