Target Corporation (TGT, Financial) recently reported earnings for the fourth quarter of fiscal 2014 that beat the estimates, despite incurring massive losses when exiting the Canadian market. The company posted adjusted earnings of $1.50 per share, surpassing the company’s own guidance of $1.43-$1.47 per share, translating to a 14.9% year-over-year growth in EPS. Target’s robust performance over the last quarter was driven by improved margins and top-line growth. Following the results, the Target stock traded at a day’s high of $78.40 before settling at $77.15 on the New York Stock Exchange.
Steady Sales Growth Props Q4 and Full-Year Results
Target saw its total sales grow 4.1% to $21.7 billion from the year-ago quarter’s figure of $20.9 billion, beating the consensus estimate of $21.6 billion. Inclusive of one-time items, the company logged EPS of $1.49 a share, up 22% from the prior-year quarter. While the company’s gross profit grew 7.3% to $6.188 billion, gross margin grew by 90 basis points to 28.5 percent. Target also reported a 13.4% rise to $1.603 billion in operating income and a 60 basis points growth in operating margin to 7.4%.
The retailer, which competes with businesses such as Wal-Mart (WMT, Financial), Costco (COST, Financial) and Sears Holdings Corp. (SHLD, Financial) currently runs 1,790 stores of which, 1,292 stores fall under the expanded grocery assortment segment, 249 are Super Target stores, 240 are general merchandise outlets, eight are CityTarget outlets and one is a TargetExpress store. While Target reported a 3.8% rise in comparable-store sales for Q4 2014, compared to a 2.5% drop during the prior-year period, the company logged a 3.2% jump in transactions with a 0.6% growth in the average transaction amount. Target also reported a 10 basis points growth in credit card penetration to 9.9% and a 20 basis points growth in debit card penetration to 11.1% during the last quarter. Overall, the penetration of the REDcard increased from 20.9% in the year-ago quarter to 21.1% in Q4 2014.
For the full-year 2014, sales grew 1.9% to $72.6 billion from $71.3 billion in the previous fiscal, indicating a 1.3% rise in comparable sales combined with sales from new stores. Earnings for the full fiscal year stood at $47.61 billion, a 4.0% decline from $49.59 billion last year.
Target paid $330 million in dividends in the fourth quarter, a 21.6% rise from $272 million paid the prior-year quarter. For the full-year 2014, the retailer paid $1,205 million in dividends, up 19.8% from the previous year’s payout of $1,006 million.
The Year Ahead
While Target will announce its guidance for the full fiscal 2015 in early March, the company indicated that it expected adjusted EPS for the first quarter of 2015 to fall in the $0.95-$1.05 range, compared to the prior-year quarter figure of $0.92. The guidance is in line with expert estimates.
Earlier in 2014, Target decided to exit the Canadian market after a comprehensive evaluation ruled out profitability in the region before 2021. The shutting down of operations is expected to be accretive to the company’s earnings going forward, and will allow Target to focus resources on developing its omni-channel capacities in the domestic markets. Consequently, the company is already witnessing an improvement in its performance in the US market, with effective inventory and price management, as well as product diversification. Target is also focusing on the development of its online portal, adding to its range of online products and provision of free shipping in order to cater to changing shopping trends and boost revenues.
Further, the company’s 5% REDcard Rewards program, Price Match strategy and P-fresh remodel program are also expected to help in boosting sales.
Final Thoughts
Target’s results for the fourth quarter and full-year 2014 have been in line with expert estimates. The company exited the Canadian market to focus resources on the domestic US market with a stress on online retailing to cater to changing shopping trends, a step that is proving profitable to the company.
Experts project an annual average growth rate of 8.44% for the company over the next five years, with the growth rate peaking in 2018. Earnings are expected to grow 6.47% in FY 2015 compared to the previous fiscal. Consequently, the Target stock currently carries a ‘Buy’ guidance.
