Yes, Target beat earnings. But with growth slowing, it may no longer be a stock worth buying.
Target (TGT 12.30%) stock exploded 12% higher through 11:15 a.m. after the company beat Wall Street analyst forecasts for second-quarter sales and earnings Wednesday morning.
Heading into the quarter, analysts forecast Target would earn $2.18 per share on sales of $25.2 billion — but Target beat those forecasts with a stick. Sales were $25.4 billion, while earnings came in at a strong $2.57 per share.
Target’s Q2 earnings
Target reported a 3% gain in Q2 sales year over year, including a 2% gain in same-store sales. What really made the difference was e-commerce sales. Those grew nearly 9% year over year, helping to provide that final 1% of total sales growth.
Target turbocharged this still rather modest sales growth with a dramatic 160 basis point increase in profit margin (now 6.4%), illustrating the margin advantages of selling online. And with each incremental sale generating more profit for Target, bottom-line profits ballooned — up 42% year over year.
CEO Brian Cornell highlighted this effect, emphasizing Target’s “double-digit growth in our same-day delivery services” as illustrating how making more sales online helped Target fuel the company’s turnaround.
Is Target stock a buy?
Now the question is whether Target can keep it up. Turning to guidance, management warned that same-store sales growth will probably slow to the 0% to 2% range in Q3, and predicted overall growth for the year will also fall in that range. Regardless, management felt comfortable raising earnings guidance for both Q3 and the year.
Target predicts it will earn about $2.25 per share in the Q3 currently underway, and end 2024 with about $9.35 per share in profit.
What does this mean for the stock’s valuation? Divided into a $160 share price, $9.35 in profit implies a still modest P/E ratio of 17. Considering that most analysts see the company’s growth slowing to about 8% annually over the next five years — and that Target itself forecasts a near-term slowdown — the stock is starting to look fully priced, and is probably no longer a buy.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.
