Chugga-chugga, chugga-chugga, chugga-chugga choo choo! That’s what I think when I consider Target Corporation (TGT) through 2017 and, in fact, over the last few years. The retailer keeps chugging along with various fits and starts and all the while with a share price that has gone nowhere in the last few years. Target “thinks it can” even though its metric performance continues to languish. Target is the epitome of an uninvestable stock when one compares the investment to the benchmark S&P 500. But that doesn’t mean that Target can’t be found and defined more appropriately as a trader’s stock. In 2017 alone, the share price has fallen below $50 and risen above $60. More narrowly, the share price has dipped below $55 and risen above $60 on several occasions that identify meaningful 10% or greater moves for which to take advantage of as a trader. In the last month or so, shares of TGT rose slightly above $63 a share before crashing unceremoniously after releasing its Q3 2017 results and forward-looking guidance. Target is a trader’s stock, nothing more and nothing less. Leaning on the stock’s 4.6% yield when the share price has been discounted by roughly 20% in 2017 doesn’t bridge any gaps in underperformance.

As we enter the all-important Holiday selling season, Target must find itself executing on sales initiatives in an incremental fashion. My characterization of the first major selling day in the Q4 2017 period is characterized in the photograph below of a Target Thanksgiving day sales event.The parking lot was packed, with overflow into the neighboring plaza.

Moreover, one selling day does not make a quarter and my experience shouldn’t be expounded upon beyond the anecdotal by investors and traders alike.

On the surface, Target had a pretty strong 3^rd quarter when compared with its peers. Target beat both top and bottom line results whereas its peers largely missed analysts’ expectations in some form or fashion. The standout metric performer for the retailer during the 3^rd quarter was of course it’s digital sales growth. Digital sales grew 24% on top of 26% a year ago. 

• Third-quarter comparable sales increased 0.9%.
• Traffic increased 1.4%, which was a deceleration from the previous quarter and largely due to a tough comparison in the same period a year ago.
• Third quarter adjusted EPS of $0.91 was near the upper end of the guidance range of $0.75 to $0.95. GAAP EPS from continuing operations was $0.87, $0.04 lower than adjusted EPS
• Third quarter gross margin rate of 29.7% was down about 10 basis points from last year.
• The count of ship-from-store locations has grown more than tenfold and it's now in more than 1,400 locations across the country.
• Launched 8 new brands in 2017.

Despite beating analysts’ expectations on top and bottom-line results, shares of TGT fell roughly 10% upon its earnings release. I’m of the opinion this reaction to the earnings release and subsequent conference call was an overreaction to rather subdued Q4 2017 guidance, lackluster in-store sales comp growth, and lump inventory levels year-to-date. While comp sales grew .9% for the quarter against an expectation by analysts of .4% comp sales growth, it is where that growth occurred that concerned investors. Of the .9% comp sales growth, .8% of the growth came from Target’s digital sales platform. That wouldn’t be such a bad or maligned performance for some retailers, but after launching 8 new brands across multiple categories this year, investors may have been concerned that these new brands weren’t resonating with consumers.

I would tend to agree with the investor concerns in this regard, but mainly because this increased new product brand rollout is nothing new for Target.  While the brand names and product packaging may have changed to look and feel somewhat new, the reality is Target consistently finds itself rebranding, adding new private label product brands and even product partnerships. The highly touted Hearth & Hand With Magnolia product line from Chip and Joanna Gaines has been the focus of Target and media headlines as of late, but the reality is this is the seventh “tie-up” between an HGTV personality and Target in the last decade. So why is this particular product partnership getting so much attention? That’s marketing folks!  And don’t get me wrong; I like the new selection of home goods, I just think for Target, it’s not a game changer or incremental to sales long-term. On the whole and with the many private label brands launched in 2017, undoubtedly the company should witness more lift in store traffic and total net sales. Having said that, more time is needed to analyze a longer sales trend when it comes to the net affect of these new brands.

When it comes to the 5 broad merchandising category of goods sold during the most recently reported quarter, here is how the categories broke down along strength of sales for Target:

• Hardlines led the way in the 3^rd quarter with a single-digit comp increase. This growth was driven by continued double-digit comp growth in electronics benefiting from newness, particularly in the video game and mobile segments.
• Home category also saw a healthy comp increase in the third quarter led by the successful launch of our new exclusive Project 62 own brand along with the continued benefit from the consumer trend of spending on their homes.
• In apparel and accessories, Target gained strong share for the quarter in a space which consumer spending in the overall market is currently declining. Despite lean inventories in the first half of the quarter, the overall comp was down only slightly. But following the launch of each of the three new exclusive apparel and accessory own brands mid-quarter, A New Day in women's, Goodfellow & Co in men's and Joy Lab in activewear, Target generated strong sales and traffic results.
• Comp sales in food and beverage were up slightly despite a continued headwind from deflation in several categories, combined with adjustments from work on pricing. Target continues to measure steady progress in food and beverage, expressing the strongest results where it has been investing. Adult beverage also continued its strength where Target saw continued double-digit comp growth, reflecting work on assortment and in-store presentation across the country.
• In essentials, Target saw a slight comp decline in the third quarter. Now, this area more than any other area has seen the most change from work on price and value.
• One further highlight was in beauty, which has continued to gain market share. This category is benefiting from investments to differentiate both the assortment and the store service model, as Target focuses on emerging trends and first-to-market brand launches, supported by an increasing number of dedicated beauty experts in-store who are available from open to close.

Essentials have proven a problematic product segment for the retailer in recent years. Despite carrying a wide breadth of essential goods, the consumer shift to online shopping has found the retailer needing to amend how it gains market share in this product category. Earlier this year the company began rolling out an initiative to address its weakness in essential good sales with Target Restock. 

“Target Restock is meant to rival Amazon’s Prime Pantry, as it also offers the ability for online shoppers to fill a box of everyday essentials online — many of which would be otherwise prohibitive to ship individually, like detergent, sodas, dog food, etc.

With Prime Pantry, customers can fill a box up to 45 pounds for a flat rate of $5.99, which is otherwise shipped for free for Prime members, as long as it has at least five qualifying items. However, the boxes are not available for expedited shipping — due to their size and weight, they’re shipped using ground shipping.

Target Restock, meanwhile, will allow online shoppers to fill a box with up to 45 pounds of similar items for $4.99 per box. However, it’s only offered to Target REDcard holders at this time, though they’re able to choose any payment method at checkout. Non-cardholders may be invited in at some point in the future, as the service expands beyond testing.”

Target Restock rolled out to consumers during the 2^nd quarter of 2017, but only in pilot stores in Minneapolis. Since then the program has rolled out to 10 additional markets. Target has offered that the average value of a Restock order is about 50% larger than an average store transaction. While the initiative has been met with strong results in test markets, it is obviously only a drop in the bucket given the miniature size of markets currently participating with Target Restock and the apparent results reported by Target for the Q3 2017 period. Like any other sales initiative, this one will need more time to extrapolate it’s potential. 

At the end of the third quarter, Target’s inventory was a little more than 5% higher than last year. In each of the previous 2 quarters, the company had seen rather strong inventory declines. The change in both trend and cadence for inventory spooked investors, especially as sales only grew 1.4% during the quarter and in-store sales only grew .1 percent. Remember, in Q1 of this year, the company reduced inventory by 5 percent. The lumpy inventory levels and management of inventory is an admitted concern of mine, but management believes they will exit the 4^th quarter of 2017 with inventory roughly flat when compared with last year. 

Target has its fair share of problems that it is aiming to course correct for more meaningful sales growth and as earnings currently suffer from these measures in place. Again, while Target beat analysts’ earnings expectations for the quarter, the results were still down roughly 13% YOY and on an adjusted basis. Much of the earnings and operating income declines are intentional as outlined by Target at the onset of 2017. The company has committed to delivering value to its consumers while gaining market share in many categories and through the implementation of pricing. Target has dedicated some $1bn in gross margins to improving its competitive pricing model for which gross margins have seen modest impact year-to-date. In fact, Target has witnessed an increase in regular price sales as the year has progressed, identifying its dedication to pricing and product launches are having some impact on the bottom-line. This bottom-line impact can also be viewed in the company’s raised guidance since the Q2 period by roughly $.50 per share. 

The balance sheet remains strong for Target with the company generating $1.5bn of cash from operations in the 3^rd quarter. In keeping with Target’s goals and guidance for the year, the retailer devoted more than $800 million of capital investment to the business in the 3^rd quarter. In addition, Target returned $339 million to shareholders in the form of dividends and another $171 million through share repurchase. Another balance sheet and EPS factor that will help margins going forward is a lower debt balance. Target’s interest expense doubled against during the Q3 period mainly because of an early debt retirement charge. Target continues to pay down debt, which will reduce its exposure to rising rates as well as boost net income margin as it pays less interest expense over time. The Q3 result for interest expense was an outlier that will likely improve going forward and for which has the potential to drive improved profitability in 2018. Now let’s take a look at the company’s guidance.

• Target is positioned to deliver comparable sales of flat or better in the fourth quarter with an upside potential for a 2% comp increase.
• Target expects to see continued pressure on gross margin rate in the fourth quarter.
• This performance translates to an expectation for both GAAP EPS from continuing operations and adjusted EPS of $1.05 to $1.25 in the fourth quarter. 
• Adding this expectation to the actual performance through the first three quarters, one will see that the expected range for FY17 adjusted EPS is now $4.40 to $4.60.

Nobody likes to see a retailer offer their high-end EPS guidance only a penny above the analyst median estimate, and that’s exactly what Target offered.  The median Q4 2017 estimate by analysts was for $1.24 per share. Investors were likely looking for an adjusted EPS number a little bit higher than what was offered and given the number of product launches already achieved in FY17. But let’s face facts folks and the fact is Target has been sandbagging guidance since it issued fY17 guidance at the onset of the year. How else do you get a revised guidance that now reflects a positive revision of the initial EPS guidance by roughly $.50 per share?

After the company released its Q1 results and Q2 guidance earlier this year I was able to recognize that guidance was too weak. Results were trending more favorably than management was “letting on”, as they say. In my YouTube interview video with David Moadel, I shared this sentiment with investors in a detailed manner. Roughly 13 minutes into the video, I stated very clearly that management was sandbagging guidance.

Only a couple months after I offered this analysis and declaration, Target issued a press release whereby the retailer raised its forecast for the Q2 2017 period. It’s with this previous, accurate analysis that I would be of the opinion the current Q4 2017 guidance is a bit more cautious than the retailer otherwise needs to be.  I believe Target has positioned itself well throughout the year to take advantage of a strong consumer during the 4^th quarter. 

Peppered throughout Target’s Q3 2017 conference call with analysts and investors, the company admits to its cautious outlook as being par for the course and consistent with it’s measures of prudent planning. Having said that, when asked directly by an analyst if the company sees any deterioration in the retailer’s progress going into Q4 2017, here is what Target’s CEO Brian Cornell had to say:

“David, we don't expect to see any deterioration in the progress that we've been making throughout the year. So, again, I think we enter the fourth quarter highly confident and a very strong position with our stores performing incredibly well. Great merchandise, a terrific marketing campaign, great digital capabilities and an expanded suite of digital fulfillment capability. So we feel very good about how the entire business is set to perform in the fourth quarter.”

Target is currently trading with an 11.5 Price to Earnings ratio, below its historic PE ratio of 14.5. Additionally, it is trading at nearly half the PE of Wal-Mart (WMT) and 2.5 points below that of Kroger (KR). With actual sales growth in-hand and meaningful improvement to the profit picture since the beginning of the year, TGT shares should be trading at a discount to its historic multiple, but not a full 3 points below it for which the share price may still meander as the Q4 period progresses. After seeing the latest results out of Target, combined with the strength of its digital platform and consumer spending, I’m a willing buyer of TGT shares on pullbacks. I still view TGT shares as nothing more than trading instruments for which to extrapolate 2-5% moves in the stock on a quarterly basis.