The Rest of the Target Corporation (TGT) Earnings Story
Kudos to retailer Target Corporation (TGT) for topping third quarter earnings and revenue estimates, and congratulations to owners of TGT shares who are enjoying this week's gains. Before anyone starts breathing easier though, it might be wise to dig a little deeper into the numbers. Last quarter's results aren't necessarily what they seemed, for better AND worse.
The good news: For its recently completed third quarter, Target posted a profit of $1.04 per share on revenues of $16.44 billion. Analysts were only looking for a profit of 83 cents per share of TGT, and a top line of $16.3 billion.
The bad news: The retailer turned $17.6 billion worth of revenue into a profit of 86 cents per share in the same quarter a year earlier.
The other good news: The decline in revenue was almost entirely the result of last year's sale of its pharmacy business to CVS; Target's pharmacy business was generating about $4.2 billion worth of revenue per year before that torch was passed to CVS Health.
The other bad news: While per-share profits grew an impressive 21%, the company's been buying back stock in spades, artificially inflating the bottom line. The number of outstanding shares fell 8.6% on a year-over-year basis, from 629 million shares a year ago to only 575 million shares as of last quarter.
The real eye-opener that materialized as of last quarter is the extent to which the company's pharmacy business was costing Target without actually adding to the bottom line. Selling and administrative expenses fell 10.6%, from $3.74 billion to $3.34 billion, mostly thanks to its exit from the pharmacy business. That $400 million difference drove all of the improvement in net income (and then some) for the quarter.
While the numbers largely confirm that Target made a wise decision in getting out of the pharmacy business and letting CVS take over that division, the retailer still has other problems to address. Namely, same-store sales are projected to be flat for the fourth quarter. By and large though, Target is on firmer footing than just a quick glance at the year-over-year comparisons might suggest. That's why TGT is up 8% in the shadow of its earnings report, and rightfully so.
It's still facing a bigger growth headwind though. The market won't forever reward standing still.