An Earnings Bullseye?

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This Thursday Target (NYSE: TGT) will announce their third quarter earnings, and I am anticipating they will beat analyst expectations yet again. Analyst estimates for this quarter are for 77 cents a share. Analysts seem bullish on the stock which has risen dramatically over the past year and many have raised price targets.

The third quarter for retailers can be dicey, as it is typically their least profitable quarter. One way to get a read on consumers spending is to track the other retailer’s earnings. Unfortunately, we are at a bit of a disadvantage due to the fact that Wal-Mart (NYSE: WMT) and Sears Holdings (NASDAQ: SHLD), i.e. Kmart, (arguably Targets two closest rivals) announce earnings on the same day. If we look at last quarters results, however, we can see a real variance in the three retailers same store sales performance. Wal-mart's second quarter results showed same store sales were up by 2.2%. Kmart, on the other hand, saw a decrease in same store sales of 4.7%. Target's same store sales were up 3.1% last quarter signaling greater strength in its consumer base.

Costco's (NASDAQ: COST) earnings this quarter might be a better indication of what Target's earnings might look like. This quarter Costco posted great numbers, beating estimates by 9 cents a share, and posting big year over year gains for the quarter. Costco also reported a 6% increase in same store sales in the U.S. This bodes well for Target since Target and Costco tend to compete for consumers in the same economic range.

Putting the numbers aside for a moment, this year Target has made some excellent strategic moves. Their plans to defend against the encroachment of online retail giant Amazon (NASDAQ: AMZN) by offering unique “boutique” style offerings is creating a renewed interest in the store. Offering exclusive products that come with a pre-tested reputation and appeal is a great way to bring people back to brick and mortar. The “boutique” plan, in combination with their recently announced price matching, will hopefully keep “showrooming” at bay this holiday season.  

As much as I like the convenience of shopping online, I do like to have the opportunity to browse, an experience that online shopping does not fully capture. There are certain products that are hard to purchase if you don't see them in person, and Amazon knows it. We all know that Amazon has upset Target's shopping cart, and even encouraged in store comparison shopping with an app that makes the comparison quick and easy. But Target is hitting back by no longer selling the Kindle, teaming with CNET to offer product reviews of electronics, and offering price matching which applies even to online prices. I don't think Target's strategies keep Amazon up at night, but I do think they will mean the best fourth quarter results that Target has seen in a while.     

Target has also started an expansion into Canada. According to the Minneapolis St. Paul Business Journal Target is planning to open 125 stores in Canada in 2013. Considering the fact that Target currently operates about 1,800 stores in the US this expansion marks a 7% increase in stores in the span of one year. I think Target will do well in Canada as I think this expansion is perhaps overdue. Who knows, maybe it will even be called Targét by the French Canadians bringing a comical legitimacy to its long time nickname.

Target's earnings should be a positive, but even if the results are not as good as I am anticipating in the short term, Target has made some great strategic moves that will translate to a higher stock price in the long run.

 


briars owns shares of Costco Wholesale and Target. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Motley Fool newsletter services recommend Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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