Retail powerhouse Target (click ticker for report: ) announced solid fourth quarter results Wednesday morning. Revenue increased 7% year-over-year to $22.3 billion, which fell short of consensus expectations. Earnings per share, when adjusted for expenses related to the Canadian rollout, grew 10% to $1.65, above consensus estimates.
Though overall sales growth was solid, same-store sales increased only 0.4% year-over-year during the quarter. The results were a little worse than the growth we saw at Wal-Mart (click ticker for report: ) and also a little worse than the same-store sales growth rate we saw at Dollar Tree (click ticker for report: ), which we would attribute to consumers being very cautious with non-core purchases during the holiday season. In fact, management noted that the less-discretionary business grew low-to-mid single digits during the fourth quarter, while the firm struggled to move hardline goods. Electronics were the worst-performing department, which management subtly blamed on Amazon (click ticker for report: ), citing “irrational promotions” from competitors. Toys were also down year-over-year, but sales of toys increased 30% via the mobile channel.
If we were to highlight any positives from the weak same-store sales growth, it is that the firm’s mobile strategy appears to be performing well. 25% of Target.com traffic is now from mobile devices, while mobile purchases now make up 7% of total online sales. Management indicated that it is getting even more traction after integrating into Apple’s (click ticker for report: ) Passbook, and we’re pleased to see the firm execute well on mobile devices—especially since its City Target customers are mobile friendly.
Costs were a bit higher on the product margin side, with the profit measure falling 60 basis points to 27.8%. US SG&A fell 10 basis points as a percentage of sales to 18% as the firm showed only modest sales leverage. Due to a change in vendor rebates, gross margins will increase in 2013 but so will SG&A, and we don’t expect changes in either metric to have a material impact on profitability.
Target seems very cautious on the consumer spending outlook heading into 2013, so we think the firm is betting on Canada to be the primary growth driver. The company will open 24 Target stores in Canada during the first quarter, and it anticipates it will open 128 doors during the year. We’re optimistic about the Canadian possibility, but we’re also pleased to hear that the company will continue to aggressively capitalize on US opportunities. Management admits that it feels sufficiently capitalized to invest in virtually any opportunity that will provide the company with a strong return.
Looking ahead, Target anticipates it will earn adjusted earnings per share of $4.85-$5.05, slightly above consensus expectations. The company didn’t give full-year sales guidance, but it did indicate that February has been weak thus far. The firm anticipates 0%-2% same-store sales growth during the first quarter, followed by accelerated growth in the second and third quarters, offset by a weak fourth quarter. We aren’t anticipating free cash flow to be strong this year as the company ramps up its Canadian operations and technology investments.
All things considered, the company has a great reputation in the US, and we think its expansion in Canada will be accretive to earnings. Nevertheless, we believe shares look fairly valued at this time.