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Target Corp. (TGT) Q4 Earnings Preview: January Clearance Hurts Margins Helps EPS Beat

 February 26, 2013 01:25 PM

(By Rich Bieglmeier) Target Corp. (TGT) will host their 4th quarter Earnings Conference Call on Wednesday, February 27, 2013 9:30 a.m. CT. Wall Street anticipates that TGT will earn $1.48 for the quarter. iStock expects department store to report earnings that will beat Wall Street's consensus number. The iEstimate is $1.51 – a 3 cent upside surprise.

Target Corporation operates general merchandise stores in the United States. As of February 21, 2013, the company operated 1,778 stores in the United States, and is the third largest retailer as measured by sales.

In the past four years, Target has done a wonderful job of bypassing Wall Street's target. Earnings have topped the consensus estimate 14 or the retailer's last 16 quarterly checkups by an average of 9.08%. The max beat was 19.70%, and the min beat 2.97%. Management missed the mark once by -3.57% and hit the bull's eye once.

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Stock price performance has been less exciting. Although shares have increased 11 times due to the company's EPS scorecard, the average gain is a limited 2.74%, topping out at 8.1%. The handful of disappointing red days nearly flipped gains, dropping by -2.96% on average. The max drawdown was 5.3% in the days surrounding earnings – very manageable.

Sales for the quarter should come in close to $22.37 billion versus the consensus estimate of $22.66 billion. Overall, year-over-year (YoY), revenue is likely to increase by 6.84% from $20.37 billion; however, 95% of the difference came from January sales. A year ago, Target earned $1.43.

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The development could be harmful to margins as Gregg Steinhafel, chairman, president and chief executive officer of Target Corporation says, "January comparable-store sales were in line with our expectations as guests responded to clearance prices on holiday inventory. Our guests continue to shop with discipline in the face of a slow economic recovery and new pressures, including recent payroll tax increases. As a result, we remain focused on providing unbeatable value combined with a superior guest experience in both our stores and digital channels."

Margins will determine if the retailer beats and by how much. In Q3, "Retail Segment EBITDA margin rate decreased slightly from the prior period, primarily due to a lower gross margin rate driven by the impact of our 5% REDcard Rewards program and our store remodel program," according to the 10-Q.  The Gross Margin Rate fell to 30.3 % from 30.5 % YoY.

Coming into the fourth quarter, inventory stood at $9,533 billion, down 3.6% YoY. So, the company was better positioned for the 2012 holiday shopping season, and January's sales of $5.973 should have removed some of the inventory hangover.

In addition to unloading inventory at clearance prices, Google trends show that reaches for "Target Red Card" are up 15.4% compared to the third quarter 2012 and 20.9% compared to Q4 a year-ago. Fortunately, queries for "Target Return" are flat YoY, but up 40% quarter-to-quarter. It's our view that the reward-card and clearance sales combo will continue to hit at margins, putting Gross Margins close to 30.1%, maybe less.

Overall, iStock expects Target Corp. (TGT) to post earnings that top Wall Street's consensus by a few pennies, but the margin story could worry investors.



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