Watch out for New Store, Digital Sales in Target Corporation (TGT)’s 2Q Earnings

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Target Corporation (NYSE:TGT)’s top line growth will be dependent on the number of new stores and increased contributions from digital sales. Target will report earnings on August 19th.

Key Factors

Target Corporation (NYSE:TGT) should be one of the beneficiaries in the retail segment due to the weak global oil price. The lower oil price meant consumer opening up their wallet beyond their regular requirements. There was nothing unfavorable from the economic front like consumer spending or the jobless claims. In the previous quarters, consumer preferred to pay back part of the debt to reduce the debt burden. It remains to be seen whether there will be any repeat of such things in the second quarter.

Though the company witnesses digital sales growth significantly, its addition to the comparable sales growth is less than a percentage only. However, the online sales are important as otherwise customers will migrate to the retailers offering the facilities. The company also seems to be testing single-day delivery for its online orders.

New Stores Contribution

The discount retailer said that the first quarter sales grew 2.8% due to a 2.3% uptick in comparable store sales apart from the sales contribution from new stores. Though digital channel sales advanced 37.8%, its contribution to comparable store sales growth was only 80 basis points in the first quarter.

It was not the first time that new store contributes to sales growth. In the past too, Target Corporation (NYSE:TGT) sales depended on the new stores contribution. Similarly, its average revenue per square foot has been witnessing volatility. The figure fell to $298 in revenue per square foot in 2013 from $304 in 2012. However, the company expressed its confidence of witnessing a growth in revenue per square foot. The retailer has kept a target of $348 in revenue per square foot. The company is also hoping to improve it to $370 fueled by Target Express expansion, as well as, City Target.

Margins To Play Key Role

In the first quarter, EBITDA and EBIT margin improved to 10.5% from 9.4% and 7.4% from 6.3% respectively. Similarly, the gross margin also improved to 30.4% from 29.5% in the preceding year quarter. That reflected the gain from the favorable merchandise mix and promotional markdowns in the previous year first quarter. Its SG&A expenses dipped to 19.9% from 20.1% since cost saving measures partly compensated the higher technology costs. The higher daily wages could play a key role in SG&A expenses in the second quarter.

While releasing first quarter results, Target Corporation (NYSE:TGT) guided adjusted EPS of $1.04 – $1.14 a share. Street analysts expect the company to earn $1.11 a share and $17.40 billion revenue.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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