Target (NYSE:TGT) stock is taking it on the chin following its just reported earnings. In this column we present the results of the quarter, but surmise that the decline in shares stems less from the performance of the name, and more from the fact that the Target holiday sales look weak. Let us discuss:
First, Target reported a third quarter 2017 comparable sales increase of 0.9 percent and GAAP earnings per share (EPS) from continuing operations of $0.87, a decrease of 17.7 percent from third quarter 2016. Third quarter adjusted earnings per share from continuing operations (Adjusted EPS) were $0.91, a decrease of 13.1 percent from third quarter 2016.
hird quarter 2017 sales increased 1.4 percent to $16.7 billion from $16.4 billion last year, reflecting a 0.9 percent comparable sales increase combined with the benefit from sales in non-mature stores. Comparable digital channel sales grew 24 percent and contributed 0.8 percentage points to comparable sales growth. Segment earnings before interest expense and income taxes (EBIT), which is Target’s measure of segment profit, were $869 million in third quarter 2017, a decrease of 17.8 percent from $1,057 million in third quarter 2016.
Third quarter EBIT margin rate was 5.2 percent, compared with 6.4 percent in 2016. Third quarter gross margin rate was 29.7 percent, compared with 29.8 percent in 2016, reflecting pressure from digital fulfillment costs and the Target’s pricing and promotion efforts, partially offset by cost savings. Third quarter SG&A expense rate was 21.1 percent in 2017, compared with 20.3 percent in 2016, driven by higher compensation costs, reflecting a year-over-year increase in team member incentives combined with the impact of investments in store team member hours and wage rates. This was partially offset by the benefit from the timing of some expenses and our ongoing cost-savings efforts. Target’s third quarter 2017 net interest expense was $254 million, compared with $142 million last year. The increase was driven by a $123 million charge related to the early retirement of debt in third quarter 2017, partially offset by the benefit of lower average debt balances.
Now that we have a handle on the third quarter, lets talk about what we mean when we say Target holiday sales look weak. Competition is stiff, and despite a strong consumer, Target issued weak guidance. Target expects fourth quarter 2017 comparable sales growth of flat to two percent. That is not good enough. That performance would translate into full-year 2017 comparable sales growth of flat to one percent. For the fourth quarter 2017, Target expects GAAP EPS from continuing operations and Adjusted EPS of $1.05 to $1.25. For full-year 2017, the Company now expects GAAP EPS from continuing operations of $4.38 to $4.58 and Adjusted EPS of $4.40 to $4.60, compared with prior guidance of $4.35 to $4.55 for GAAP EPS from continuing operations and $4.34 to $4.54 for Adjusted EPS.
Because Target holiday sales look weak, investors are selling the stock fast, with shares down 7% at the time of this writing.
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