Target Corporation (NYSE: TGT) is off to a hot start to 2018 after the company updated its fourth-quarter guidance this week following a stronger-than-expected holiday season. But while some U.S. retailers are surviving on a quarter-by-quarter basis, Target may have positioned itself to be a rare long-term growth play in the U.S. retail sector.
According to Susquehanna analyst Bill Dreher, the heavy investment stage of Target’s omni-channel initiative may be completed sooner than investors realize, setting the stage for an extended period of stock outperformance and earnings per share upside.
“The company is exiting a deep omni-channel and private-label investment phase, and EPS growth is reaccelerating to a double-digit rate in fiscal 2018, which is much faster than we or consensus estimates had anticipated,” Dreher says.
Dreher says Target has now joined Wal-Mart Stores (WMT) and a handful of other brick-and-mortar retailers who are positioned to survive the “ongoing retail apocalypse” brought on by Amazon.com (AMZN) and other online competitors.
Last year, Target said it planned to invest $7 billion on its onmi-channel initiatives, including increasing private-label offerings, remodeling its stores and expanding its online business. The initiatives seem to already be paying off. This week, the company said same-store sales growth will likely improve from 0.9 percent in the third quarter of 2017 to 3.4 percent in the fourth quarter.
Less than three months ago, Dreher was anticipating a 2.7 percent EPS decline from Target in fiscal 2018. Dreher now expects 10.4 percent EPS growth instead. Dreher is calling for 2018 EPS of $5.20, on the low end of Target’s updated guidance range of between $5.15 and $5.45.
After a difficult 2017, Dreher says Target is still mostly flying under the radar on Wall Street heading into 2018.
“We believe that the majority of investors are missing the speed with which Target has been able to accelerate its omni-channel transition and the strong benefit of tax reform on earnings going forward,” Deher says.
In the near-term, the rumor mill could also serve as a positive catalyst for Target. Loup Ventures analyst Gene Munster has speculated…
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