Target’s Second Quarter Results Better Than Feared

Image: Target’s shares have been quite volatile since the beginning of 2023.

By Brian Nelson, CFA

Target (TGT) reported better than expected second quarter results with revenue and non-GAAP earnings per share coming in higher than the consensus forecasts. Sales grew 2.7% thanks to comparable store sales growth of 2%, which came in at the high end of the company’s expectations and above the consensus estimate of 1.1%. The quarter for Target marked a return to top-line growth and positive comparable store sales expansion and showcased meaningful margin expansion.

Traffic at Target advanced 3% in the period as all six of its core merchandising categories delivered growth, with Apparel comparable sales growing 3%+ in the quarter. Digital comparable store sales increased 8.7% as its same-day services experienced double-digit expansion. Target’s second quarter operating margin came in at 6.4%, which was up 160 basis points from the prior-year period. GAAP and adjusted earnings per share increased more than 40% over the same period a year ago, to $2.57 per share.

Management’s commentary in the press release was upbeat:

We made a commitment to get back to growth in the second quarter, and the team delivered, all while expanding operating margins and growing EPS by more than 40% compared to last year. Importantly, our growth was driven entirely by traffic in stores and our digital channels, with double-digit growth in our same-day delivery services. We also saw improving trends across our discretionary categories, most notably in apparel, and we’re seeing continued strength in beauty. Looking ahead, even as we maintain the measured outlook that has served us well, we are focused on building on this positive momentum by executing our strategy and providing the unique combination of newness and value that consumers can only find at Target.

During the quarter, Target paid dividends of $509 million, while it repurchased $155 million of its shares. At the end of its second quarter, Target had ~$9.5 billion of remaining capacity under its share buyback program. For the trailing twelve months through the second quarter of 2024, after-tax return on capital [ROIC] came in at 16.6% versus 13.7% over the same period ending the second quarter of 2023. Target ended the quarter with $15.3 billion in short- and long-term debt and $3.5 billion in cash and cash equivalents. Free cash flow of $2 billion during the first six months of its fiscal year was nearly double the cash dividends paid over the same time period.

Looking ahead, Target expects a 0%-2% increase in comparable store sales and adjusted earnings per share in the range of $2.10-$2.40 in the third quarter (consensus was $2.24). For the full year, management thinks that comparable store sales growth will be in the 0%-2% range, with an increased likelihood that the increase will be in the lower half of the range. Target, however, now expects full-year GAAP and adjusted earnings per share in the range of $9.00-$9.70, which is up from previous expectations in the range of $8.60-$9.60 and the midpoint higher than the consensus forecast of $9.22 per share. Our fair value estimate of $155 per share remains unchanged at this time. Shares yield 3.1%.

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