TGT: Report Fiscal Q4 Tomo Before Open, Our Preview

by Dan February 22, 2012 3:07 pm • Commentary

TGT ($53.00)  No New Trade, But Some Food For Thought

-Target will report their Fiscal Q4 tomorrow before the open.  The company pre-announced disappointing earnings for their Q4 on Jan 5th (company guided 1.35 to 1.43 vs consensus at 1.48 and previous guidance of 1.43 to 1.53)

-The options market is implying about a 2.5% move which is a tad rich to the 4 qtr average move of about 2%

-As of 3pm, options volume is running about 2x average with most of the volume coming in March and April btwn the 50 52.5 Puts and the 52.50 and 55 Calls.

Price Action/Sentiment/Valuation:

-TGT is up 3.4% ytd lagging the SPX which is up 8.2% and the XRT (the S&P retail etf) which is up about 11% ytd.

-Wall Street analysts fairly mixed on the stock with 16 Buys and 12 Holds, with a 12 month price target of about $58.

-Short interest is at a paltry 1% of the float.

-TGT trades at about 12.5x expected fiscal 2013 earnings with eps growth expected to be flat year over year, while WMT trades at about 12.1x expected fiscal 2013 earnings with eps growth expected to be about 8%.  Hard to make a claim that TGT is cheap on a PE to growth comparison to WMT.


The chart below shows that WMT and TGT were trading in lock step with one another until late Oct when the stocks just decoupled, with TGT selling off about 15% from that point and WMT making a series of new 52 week highs until yesterday’s report.

[caption id="attachment_8991" align="aligncenter" width="300" caption="1 YR TGT vs WMT chart from Bloomberg lp"][/caption]


When you back this same chart out to 3 years you see that the stocks have basically traded in lock step, but occasionally separate as they have done over the last few months.

[caption id="attachment_8994" align="aligncenter" width="300" caption="3 yr TGT vs WMT chart from Bloomberg LP"][/caption]


MY TAKE: (see JPM & Bloomberg preview below)  TGT pre-announced a weak Q4 back in early Jan, so I wouldn’t expect an earnings print outside the previous guidance.  The stock is going to trade on fiscal 2013 guidance which the street currently has as at flat….there could def be a little room here for the company to guide slightly better than some fairly dreary expectations….But any meaningful disappointment on guidance and the stock is at $50 in a quick.

I don’t have strong conviction either way, and frankly don;t know the company or the sector well enough to make a trade.   This is a good example at the inputs I use to make decisions and in this case with no new trade I thought I would put them down for those interested to read.



JP Morgan Analyst Chris Horvers, who rates the stock Neutral with a 12 month price target of $64 had the following preview laying out the bull bear debate in a note to clients dated Feb 16th 2012:

TGT: Two Distinct Investor Camps. The positively inclined minority cite investor apathy (as indicated by trading at 12.2x 2012, the low end of comparable large cap/big box retailers), the potential for modest EPS upside in 4Q, improving comps due to mix, and a favorable macro backdrop as reasons to be long (with the latter overwhelming the “core” comp issue overtime). The bulls also generally view the stock as cheap given the potential long run earnings accretion from Canada (arguing that the current valuation reflects all the expense but no risk-adjusted benefit from projected future sales).

On the other hand, the bears view TGT as a value trap given weakness/volatility in sales outside of grocery (what happened to “Tarjay”?), fading PFresh/REDCard sales benefits, and pressures on profitability from credit and Canada. We generally fall into the more skeptical camp and don’t believe that the acceleration in comps in 1Q due to a mix shift back to grocery (and away from home and electronics) will get the stock above the mid-$50s level in the near term barring continued employment improvement.

TGT: Framing 2012 guidance. TGT starts 2012 at ~$3.90 before any assumption for sales and buyback. The build starts with $4.24 consensus for 2011. First, a decreased level of credit card profitability could drag down EPS by ~$0.20 YOY in 2012. Second, Canadian investments drag earnings down EPS $0.25-$0.30 incrementally. Third, a 53rd week should aid results by ~$0.10-$0.15 in 2012. If we assume ~$1.9B in buyback, we get back to ~$4.00. Current consensus for 2012 is $4.24,
implying a modest comp (2-3%). Net-net, while consensus doesn’t appear onerous, sales volatility and slowing initiative-driven sales suggest that a conservative tact to guidance/expectations is in order.

TGT 4Q expectations. For 4Q, we anticipate EPS of $1.39 vs. consensus of $1.40 and guidance of $1.35-$1.43. We expect merchandise gross margin to decline ~30 bps, while SG&A expense increases a similar amount. As such, we anticipate retail EBIT margins down ~60 bps to 7.3%.



• 4Q adj. EPS est. $1.39 (range $1.32-$1.43); Jan. forecast $1.35-$1.43
• 4Q rev. est. $21.2b (range $20.9b-$21.6b)
• Gross margin est. 28.8%, vs 31.9% Q/q, 30% Y/y
• NOTE: TGT earlier this month gave prelim. 4Q net retail sales $20.9b, comp. sales up 2.2%
• TGT likely to give initial yr EPS forecast; adj. EPS est. $4.25
• Robert W. Baird sees yr comps. up 3%, helped by at least 150 bps gain from PFresh grocery program
• Maintaining comp. growth above 3% “critical” to regaining investor confidence: Susquehanna
• Easing promotions likely drove Jan. comp. sales above est. after misses in Nov., Dec.: Baird
• Same-store sales comparisons “accomodative” in next few months, become more difficult starting in June: Susquehanna
• Watch comments on impact of Canadian expansion; investments may hurt yr EPS by 25c-30c: JPMorgan
• NOTE: WMT yesterday said core consumers remain cautious, sees U.S. grocery inflation ~4%

• TGT met or beat EPS ests. in 7 of last 8 qtrs
• TGT gained avg. 1% on last 8 reports; implied 1-day move based on options for up 2.4%
• TGT up 2.3% YTD vs WMT down 1.8%

TIMING: TGT reports 7:30am tomorrow, call 10:30am 866-359-9310
pw Target