TGT 2Q: What to look for

Target is set to report second quarter earnings Wednesday morning, and let’s just say it would be a surprise if there were any surprises. The company is pretty thorough when it comes to managing investor expectations and provides commentary regarding whether analysts’ estimates are too high or too low.

That was the case at the end of the first quarter when the company indicated the then consensus estimate of $1 a share for the second quarter was too high, or as CFO Doug Scovanner indicated “above the midpoint of a reasonable range of likely outcomes.”

Analysts took a look at their assumption and second quarter estimates came down to where the consensus now is for Target to report a second quarter profit of 97 cents a share. In addition, investors already have good visibility into Target’s sales as the company continues to report monthly results. Second quarter same-stores sales increased roughly 3.9% and because Target provides category specific insights analysts are also able to gauge the profitability of those sales.

While there is much analysts already know or are able to surmise about Target’s second quarter performance, there is plenty they don’t know and will be eager to learn about. For example, Target’s entry into Canada is a huge wildcard, even though the first stores are not slated to open until 2013. The company is already incurring expenses related to the market entry and doing so at a rate faster than originally anticipated when the deal was announced in January. This is Target’s first international market entry, and while the size of the prize is large if the market is successfully penetrated, there is considerable execution risk and uncertainty around expenses which makes investors nervous.

Senior executives will be expected to provide an update on the Canadian expenses outlook in addition to other near term initiatives in the United States. For example, the company’s ongoing rollout of the PFresh format, the penetration rate of REDcard Rewards and that program’s impact on same-store sales are sure to be hot topics. So too is an update on the sale of the company’s credit card business and perspective on the competitive climate, the pricing environment and whether it remains rational. 

And what about the company’s major relaunch of its website. It is already mid-August so early season holiday activity will soon be here and investors will be looking for some insight into Target online plans and relaunch efforts.

As is typically the case, Target’s actual second quarter performance will be less important than what the company has to say about its near term earnings outlook. The pace of sales during the back-to-school season, third quarter same store sale guidance and profit expectations.

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