Target Corporation (NYSE:TGT) posted second-quarter fiscal 2016 results, wherein adjusted earnings of $1.23 per share surpassed the Zacks Consensus Estimate of $1.14 and management’s previous provided guidance of $1.00 to $1.20 per share. Earnings per share of this Zacks Rank #2 (Buy) company inched up 0.5% year over year.
Including one-time items, earnings from continuing operations came in at $1.07 per share compared with $1.21 reported in the year-ago period.
Target wind up its Canadian operations after a comprehensive evaluation. This is enabling the company to deploy resources solely in the domestic markets and focus on developing its omnichannel capacities. The company also intends to invest in merchandise categories such as Style, Baby, Kids and Wellness.
Despite better-than-expected bottom line results, stock plunged 5.5% during pre-market trading hours as top line continues to struggle and management trimmed its outlook citing tough retail environment.
Let’s Unveil the Picture
Total sales declined 7.2% to $16,169 million from the prior-year quarter, and also came below the Zacks Consensus Estimate of $16,245.2 million, thus marking the fourth straight quarter of revenue miss. The sale of the pharmacy and clinic businesses to CVS Health (NYSE:CVS) impacted the top line.
Minneapolis-based Target’s comparable sales for the quarter decreased 1.1%. The number of transactions declined 2.2%, while the average transaction amount climbed 1.1%. Comparable digital channel sales surged 16% and added 0.5 percentage points to comparable sales.
Gross profit decreased 5.7% to $5,067 million, however, gross margin expanded 40 basis points to 31.3%. Operating income fell 8.1% to $1,241 million, while operating margin remained flat at 7.7%.
Target’s credit card penetration expanded 100 basis points to 11.1%, whereas debit card penetration increased by 70 basis points to 12.7% during the quarter. Total REDcard penetration climbed to 23.9% from 22.1% in the year-ago quarter.
Other Financial Details
During the quarter, Target repurchased 19 million shares at a price of $70.91 per share, aggregating $1,350 million and paid dividends of $330 million. Under the current $10 billion share buyback program, the company has repurchased 125 million shares at a price of $70.57 per share, totaling approximately $8.8 billion.
The company ended the quarter with cash and cash equivalents (including short-term investments) of $1,480 million, long-term debt and other borrowings of $12,063 million and shareholders’ investment of $11,577 million.
Stores Update
Target, which competes with Costco Wholesale Corp. (NASDAQ:COST) , Sears Holdings Corp. (NASDAQ:SHLD) and Wal-Mart Stores Inc. (NYSE:WMT) , operated 1,797 stores as of Jul 30, 2016.
A Glance at the Outlook
Target lowered its outlook for fiscal 2016. The company now envisions adjusted earnings in the band of $4.80–$5.20 per share compared with $5.20–$5.40 per share expected earlier. For the third quarter, the company expects adjusted earnings per share in the range of 75–95 cents. The current Zacks Consensus Estimate for the third quarter and fiscal 2016 stand at 98 cents and $5.16, respectively.
Further, management anticipates comparable sales to be flat to down 2% during both the third and fourth quarters of fiscal 2016.
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