Target shares soar on strong EPS growth and in-line guidance

Target Corporation (TGT) reported impressive results for the fourth quarter, surpassing expectations for both revenue and earnings. Throughout 2023, the retailer faced challenges as consumer preferences shifted towards essential goods such as food and beverages, and away from discretionary spending. 

In response, TGT streamlined its operations and adjusted its inventory to better align with this new consumer behavior. This strategic pivot began to bear fruit as shares started to recover in November, marking a 10% increase Year-To-Date. The positive quarterly results have bolstered investor confidence in Target's ongoing turnaround efforts, propelling the stock up by 10% in pre-market trading, reflecting widespread endorsement of the company's current strategy.

TGT reported strong fourth-quarter earnings per share (EPS) growth of 158% to $2.98, easily beating estimates of $2.35. The company's total comparable sales declined by 4.4%, reflecting a store comp of 5.4% and a digital comp of 0.7%. However, the results were in line with expectations, with foot traffic down 1.7% from the previous year, an improvement from a 4.1% decline in the third quarter.

The operating margin expanded by 215 basis points to 5.8%, driven by a gross margin expansion of around 290 basis points to 25.6%, primarily due to lower markdowns, freight, supply chain, and digital fulfillment costs, as well as favorable product mix. The total SG&A ratio deleveraged by around 80 basis points to 20.8%, mainly due to higher labor costs and softer sales.

Inventory ended the year in a healthy position, down 11.9% compared to sales growth of 1.7%, which should help profitability going forward. Overall, the fourth quarter was better than expected, reflecting good execution in a challenging environment.

For the first quarter of 2024, Target guided EPS to be between $1.70 and $2.10, with a comp of (-3.0%) to (-5.0%). The outlook likely reflects a slower start to the quarter due to difficult consumer spending trends, especially for discretionary items. For the full year, Target expects EPS of $8.60 to $9.60, with a comp of 0.0% to 2.0%.

Investors seem to be relieved by the strong EPS beat and in-line guidance. The company's long-term prospects remain promising, with ongoing strategies such as price investments, private brands, remodels, small-format stores, fulfillment/supply chain enhancements, loyalty programs, and Target + marketplace supporting market share gains. Additionally, partnerships with top brands, such as Ulta Beauty, and a multi-year profitability recovery fueled by significant earnings growth provide further upside potential.

In conclusion, Target's fourth-quarter earnings report demonstrates the company's resilience and ability to execute in a challenging environment. With in-line guidance and a strong long-term outlook, Target remains a promising investment opportunity for investors seeking exposure to the retail sector.

Shares of Target soared in premarket trading on Wednesday following the release of the company's fourth-quarter earnings report, which easily topped expectations. The company also issued in-line guidance for the first quarter and full year 2025, which met low expectations and is likely to prove conservative, especially if we see a recovery in discretionary spending.

Target's strong EPS growth, in-line guidance, and ongoing strategies for market share gains, profitability recovery, and earnings growth make it an attractive investment opportunity for investors seeking exposure to the retail sector.