Target (TGT) significantly exceeded fourth quarter earnings expectations when it reported results on Tuesday.
On March 5th, the retailer announced that holiday period profits rose 58% year-over-year to $2.98 per share, handily exceeding Wall Street’s forecast of $2.41 per share. Target’s EPS also exceeded management’s guidance of a range of $1.90 to $2.60.
Following the announcement and positive comments from management, Target’s stock surged by 12%, reaching $168.58 on Tuesday. Shares of Target hit an intra-day high of $170.47 which was slightly short of the 52-week high of $171.24.
While Target’s stock remains within striking distance of its 52-week high, shares are still far removed from its November 2021 record peak of $250.98. For investors that like a good comeback story, this discount retailer may have more room to run.
In addition to reporting better than expected Q4 financials, Target unveiled a series of initiatives designed to boost customer engagement and sales in 2024 and beyond. Battling challenges such as soft discretionary spending, rising labor costs, and inventory issues, the nation’s seventh-largest retailer is now showing signs of recovery.
Let’s check out what drove the Q4 beat and what’s ‘in store’ for this year.
Cost Controls Are The Real Star
When a company reports 58% profit growth, this is often driven by strong sales growth. However, this was not the situation with Target.
Although Target flashed some impressive sales metrics — including a 13.6% jump in same-day services — overall revenue grew just 1.7% compared to the fourth quarter of 2022. Comparable store sales fell 4.4%. Thus, despite the encouraging demand for convenient services like drive-up, in-store pickup, and Shipt delivery, the real success story of Q4 was Target’s enhanced operational efficiency.
Target’s inventory problems have much improved as evidenced by lower markdowns and related expenses during the all-important holiday quarter. Additionally, there was a significant reduction in freight and supply chain expenses. Although theft continues to be a concern, smarter timing of inventory accruals contributed to a reduction in shrinkage costs compared to the previous year.
The Target Shopper Experience Is Getting A Makeover
In tandem with its Q4 financial results, Target announced plans to revamp its rewards program and in-house brands.
First, the popular Target Circle program is expanding to include new membership options. On April 7th, Target will revamp its Circle loyalty program into a three-tier system offering free, 5% off card, and 360 premium membership options. With shoppers afforded more choice, expect Target’s 100 million membership base to reach new levels in the coming years.
Next, Target’s $30 billion owned brand portfolio is about to get bigger. Target intends to introduce fresh and trendy products under its ‘up&up’, ‘dealworthy’, and ‘Gigglescape’ brands. These brands not only offer value on everyday essentials, beauty products, and toys, but typically come with higher margins. Should these brands be well-received by consumers, they are expected to boost future profit margins.
More EPS Beats And Stock Gains May Lie Ahead
While Target forecasts flat to 2% comparable sales growth this year, profit growth is expected to continue. Management’s 2024 EPS guidance of $8.60 to $9.60 is a wide range, but at the midpoint, implies 2% growth. Given that Target has surpassed consensus EPS estimates for five consecutive quarters, this guidance may be on the conservative side.
Bottom Line
Target is steering itself back on course at a crucial moment. Deflation and anticipated Fed interest rate cuts are likely to boost consumer spending on discretionary merchandise in the quarters ahead. The introduction of flexible membership options and an enhanced selection of in-house brands could drive stronger sales among the company’s loyal, cost-conscious customers.
