In line quarter from TGT (holiday sales already reported) and largely uneventful analyst meeting. For the quarter TGT put up $0.04 per share EPS upside coming from lower tax rate and share count. Guidance for 1Q and FY20 straddling the consensus – though it’s worth noting that the 1Q guide is an absolute slam dunk with TGT likely to clock in close to 18% EPS growth (I’m at $1.80 vs $1.55-$1.75 guide) – but then EPS growth gets more than cut by half for the balance of the year – particularly 2Q and 3Q (where our model falls to LSD EPS). That’s notable because the Consensus has an even 8% EPS growth across every quarter of this year. During the fourth quarter we saw digital orders +20%, implying a -0.6% comp in physical stores. Inventories look very well controlled – arguably too controlled as TGT probably left some top line on the table -- down 5.3% on top of 1.8% revenue growth and a 66bps improvement in Gross Margin – setting up for another big GM in 1Q. TGT is doing a lot of the right things, but note that margin compares start getting tougher for TGT in another quarter, at the same time we could see store-level traffic slow even further as the consumer slows. Worth noting for a secularly-challenged retailer that’s over-owned, under-shorted, arguably fairly valued, and has been a big beneficiary of the low unemployment cycle. TGT sits on our Short Bench – pending what’s likely to be a 1Q beat (covid-19 preparedness shopping on top of easy margin compare and clean inventories).
Callouts
- On track to reach $15 starting wage by the end of the year. (tough to model sub-3% SG&A growth)
- 2-4% improvement from store remodels – consistent with prior.
- Opening new warehouses in key markets like NYC and LA to support replenishment.
- Feb. is off to a good start. Covid-19 helping thus far. Expect a consistent performance throughout the year (tough to bless that statement).
- Digital six straight years of 20%+ growth – but put up its lowest growth rate in 14 quarters.
- Growing Shipt same-day delivery offering with 2.5x the sales of the prior year.
- Starting Target Plus, which is TGT’s take on the marketplace approach employed by AMZN and WMT. Includes a small number of brands (100 as of today) where TGT curates specific product that otherwise would not be found at the retailer.
- Sees 25% of drive-up sales and 100% of purchases on Shipt as incremental.
- Target sales fulfilled by same-day options grew more than 90% in 2019, driving the majority of digital growth.
- Because same day delivery has better economics than 2 day, TGT saw a 25% drop in the average cost of fulfillment.
- Toys were flat. Electronics were disappointing. Will learn from this past holiday for the next one. Excited for some of the newness in electronics.
- Getting some national brand wins – some new vendors, apparel with Levi’s, Disney, beauty, Boar’s Head, etc.
- Because the top quartile of stores have productivity $100 psf higher than the chain and $1bn in sales fulfilled by stores only increases the productivity by $4 psf TGT sees that there is the capacity to handle significantly more in sales with the existing footprint.
- Guidance is for SSS to be up LSD% with total sales growth 1% higher due to non-mature stores. Gross margins to be essentially flat, and a moderate increase in SG&A expense rate. Labor costs are the pressure in SG&A. EBIT margins expected to be flat to up slightly.
