Target Corp. Beats on Q4 Earnings Estimates but Sales Fall Short

Target Corp said its fourth-quarter and full-year 2023 results benefited from an additional week of sales compared to 2022. Sales fell short of expectations in the fourth quarter on a challenging holiday selling period, but earnings beat estimates as the retailer posted GAAP and Adjusted earnings per share of $2.98, compared with $1.89 in Q4 2022. 

Analysts were reportedly looking for $2.42 a share for the fourth quarter.

“Our team’s efforts changed the momentum of our business, further improving our sales and traffic trends in the fourth quarter while driving profitability well ahead of expectations,” said Brian Cornell, chairman and CEO of Target Corp. “Throughout the season, guests responded to newness, value and the inspiration and ease of our in-store and digital shopping experience. Looking ahead, we’ll continue to invest in the strengths and differentiators that have delivered strong financial performance over time. We’ll also roll out fresh innovations, including our new Target Circle membership program, as part of our roadmap for growth aimed at meeting consumers where they are, reigniting sales, traffic and market share gains, and positioning Target for profitable growth in 2024 and beyond.”

Fourth Quarter Results
The company’s total comparable sales declined 4.4 percent in the fourth quarter, reflecting a comparable store sales decline of 5.4 percent and a comparable digital sales decline of 0.7 percent. 

Total revenue of $31.9 billion grew 1.7 percent in the fourth quarter compared with the 2022 quarter, driven by sales growth of 1.6 percent and a 9.8 percent increase in other revenue. Sales growth was said to reflect an additional week in fiscal year 2023.

Fourth quarter gross margin rate was 25.6 percent, compared with 22.7 percent in 2022, reflecting lower markdowns and other inventory-related costs, lower freight costs, lower supply chain, digital fulfillment costs, and a favorable category mix. Shrink costs were lower than a year ago, as continued increases in store loss rates were more than offset by the timing of inventory accruals compared with 2022.

Fourth quarter SG&A expense rate was 18.9 percent in 2023, compared with 18.1 percent in 2022.

Operating income was $1.9 billion in fourth quarter 2023, an increase of 60.9 percent from $1.2 billion in 2022. Fourth quarter operating income margin rate was 5.8 percent of sales in 2023 compared with 3.7 percent in 2022.

The company’s fourth quarter 2023 net interest expense was $107 million, compared with $129 million last year, reflecting an increase in interest income partially offset by higher debt levels and the impact of higher floating rates on interest rate swaps. The fourth quarter 2023 effective income tax rate was 22.6 percent, compared with 16.1 percent last year.

Full-Year Results
Full-year sales decreased 1.7 percent to $105.8 billion from $107.6 billion in the prior year, reflecting a 3.7 percent decrease in comparable sales partially offset by sales from non-mature stores and an additional week in 2023. Full-year total revenue of $107.4 billion decreased 1.6 percent compared with 2022, reflecting a 1.7 percent decline in sales partially offset by a 5.1 percent increase in other revenue.

Full-year gross margin rate was 26.5 percent, compared with 23.6 percent in 2022, reflecting lower markdowns and other inventory-related costs, lower freight costs and lower supply chain and digital fulfillment costs partially offset by higher inventory shrink.

Full-year SG&A expense rate was 20.1 percent in 2023, compared with 18.9 percent in 2022. Rate increases in both periods reflect the de-leveraging impact of lower sales and higher costs, including continued investments in pay and benefits and inflationary pressures throughout our business partially offset by disciplined cost management.

Full-year operating income of $5.7 billion in 2023 grew 48.3 percent from $3.8 billion last year.

Full-year 2023 net interest expense was $502 million, compared with $478 million in 2022, driven by higher average debt levels and the impact of higher floating rates on interest rate swaps partially offset by an increase in interest income.

The company’s full-year 2023 effective income tax rate was 21.9 percent compared with 18.7 percent in 2022. The fourth quarter and full-year tax rate increases reflect higher pretax earnings and lower discrete benefits in fiscal year 2023.

GAAP and Adjusted EPS were $8.94 for full-year 2023, compared with $5.98 in GAAP EPS and $6.02 in Adjusted EPS in the prior year.

Capital Deployment and Return on Invested Capital
The company paid dividends of $508 million in the fourth quarter, compared with $497 million in 2022, reflecting a 1.9 percent increase in the dividend per share.

The company did not repurchase any shares in fourth quarter 2023. As of the end of the fourth quarter, the company had approximately $9.7 billion of remaining capacity under the repurchase program approved by Target’s Board of Directors in August 2021.

For the trailing twelve months through fourth quarter 2023, after-tax return on invested capital (ROIC) was 16.1 percent, compared with 12.6 percent for the twelve months through fourth quarter 2022. This increase was driven primarily by higher profitability, partially offset by an increase in average invested capital. The tables in this release provide additional information about the company’s ROIC calculation.

Outlook
For first quarter 2024, Target Corp. expects a comparable sales decline of 3 to 5 percent. First-quarter GAAP and Adjusted EPS are both expected to range from $1.70 to $2.10 a share.

For the full year, the company expects a modest increase in comparable sales from flat to two percent. GAAP EPS and Adjusted EPS are both expected to range from $8.60 to $9.60 a share.

Image courtesy Target