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Target (NYSE:TGT) Posts Q1 Sales In Line With Estimates But Stock Drops


Full Report / May 22, 2024

General merchandise retailer Target (NYSE:TGT) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 3.1% year on year to $24.53 billion. It made a non-GAAP profit of $2.03 per share, down from its profit of $2.05 per share in the same quarter last year.

Target (TGT) Q1 CY2024 Highlights:

  • Revenue: $24.53 billion vs analyst estimates of $24.54 billion (small miss)
  • EPS (non-GAAP): $2.03 vs analyst expectations of $2.06 (1.2% miss)
  • EPS (non-GAAP) Guidance for Q2 CY2024 is $2.15 at the midpoint, below analyst estimates of $2.19
  • EPS (non-GAAP) Guidance for full year 2024 maintained at $9.10 at the midpoint, below analyst estimates of $9.42
  • Gross Margin (GAAP): 28.9%, up from 27.4% in the same quarter last year
  • Free Cash Flow of $427 million is up from -$340 million in the same quarter last year
  • Same-Store Sales were down 3.7% year on year (slight miss vs. expectations of down 3.6% year on year)
  • Store Locations: 1,963 at quarter end, increasing by 9 over the last 12 months
  • Market Capitalization: $72.07 billion

With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE:TGT) serves the suburban consumer who is looking for a wide range of products under one roof.

Founded in 1902 as the Dayton Dry Goods Company, Target now positions itself as both a one-stop shop but also a trendier alternative to competitors. The company serves the customer who is both value and trend-focused, and this customer is usually a middle-aged female shopping for herself and her family. While that shopper can find everything from clothing to home decor to toys to groceries at Target, the company differentiates itself through collaborations with designers to create exclusive clothing lines or partnerships with popular brands. The aim is to bring affordable luxury within reach of its customers.

A traditional Target store is large and averages over 100,000 square feet. These stores are located mostly in suburban areas, often as an anchor tenant in a shopping center and in close proximity to residential neighborhoods. The store layout is straightforward and organized, with sections for grocery, apparel, electronics, and home goods. Target has also introduced smaller, more localized store formats to serve urban and densely populated areas such as college campuses. In addition to physical stores, Target has an e-commerce presence that was launched in 2000. Customers can shop online and choose home delivery or store pickup, even with grocery offerings.

Large-format Grocery & General Merchandise Retailer

Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.

Scaled competitors that sell general merchandise and/or groceries to US consumers include Walmart (NYSE:WMT), Amazon.com (NASDAQ:AMZN)–which as a reminder owns Whole Foods market, and Costco (NYSE:COST).

Sales Growth

Target is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.

As you can see below, the company's annualized revenue growth rate of 6.9% over the last five years was weak as its store footprint remained relatively unchanged.

Target Total Revenue

This quarter, Target missed Wall Street's estimates and reported a rather uninspiring 3.1% year-on-year revenue decline, generating $24.53 billion in revenue. Looking ahead, Wall Street expects sales to grow 1.2% over the next 12 months, an acceleration from this quarter.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Target's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 1.6% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Target Year On Year Same Store Sales Growth

In the latest quarter, Target's same-store sales fell 3.7% year on year.

Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Target keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. As of the most recently reported quarter, Target operated 1,963 total retail locations, in line with its store count a year ago.

Target Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.

Target has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 26.4% gross margin over the last two years. However, when comparing its margin specifically to other non-discretionary retailers, it's actually pretty decent. That's because non-discretionary retailers have structurally lower gross margins as they compete to provide the lowest possible price, sell products easily found elsewhere, and have high transportation costs to move their goods. We believe the best metrics to assess these types of companies are free cash flow margin, operating leverage, and profit volatility, which take their scale advantages and non-cyclical demand characteristics into account.

Target Gross Margin (GAAP)

Target produced a 28.9% gross profit margin in Q1, marking a 1.5 percentage point increase from 27.4% in the same quarter last year. This margin expansion was particularly strong for a retailer like Target, which is structurally less profitable than the typical retail business for the reasons mentioned above, as it signals a less competitive environment with more stable input costs (such as freight expenses to transport goods) and less pressure to discount products.

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Target generated an operating profit margin of 5.3%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Target Operating Margin (GAAP)

Zooming out, Target was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 4.4%. However, Target's margin has improved, on average, by 1.8 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q1, Target reported EPS at $2.03, down from $2.05 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

Target EPS (Adjusted)

On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 8.5% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Target's free cash flow came in at $427 million in Q1, representing a 1.7% margin and flipping from negative in the same quarter last year to positive this quarter. Seasonal factors aside, this was great for the business.

Target Free Cash Flow Margin

Over the last two years, Target has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 2.4%, slightly better than the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 3.8 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Although Target hasn't been the highest-quality company lately, it historically did a solid job investing in profitable business initiatives. Its five-year average ROIC was 19.7%, higher than most retailers.

Target Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Target's ROIC averaged 9.6 percentage point decreases over the last few years. We like what management has done historically but are concerned its ROIC is declining, perhaps a symptom of waning business opportunities to invest profitably.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Target reported $3.60 billion of cash and $19.49 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $8.25 billion of EBITDA over the last 12 months, we view Target's 1.9x net-debt-to-EBITDA ratio as safe. We also see its $249 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Target's Q1 Results

We liked how Target beat analysts' gross margin expectations this quarter. On the other hand, guidance was weak, with both next quarter and full-year earnings forecast missing analysts' expectations. Overall, this was a mediocre quarter for Target. The company is down 6.9% on the results and currently trades at $145 per share.

Is Now The Time?

When considering an investment in Target, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Target isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its coveted brand awareness makes it a household name consumers consistently turn to, the downside is its shrinking same-store sales suggests it'll need to change its strategy to succeed. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses.

Target's price-to-earnings ratio based on the next 12 months is 16.1x. In the end, beauty is in the eye of the beholder. While Target wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.

Wall Street analysts covering the company had a one-year price target of $184.67 per share right before these results (compared to the current share price of $145).

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