General merchandise retailer Target (NYSE:TGT) met Wall Street’s revenue expectations in Q4 CY2024, but sales fell by 3.1% year on year to $30.92 billion. Its non-GAAP profit of $2.41 per share was 7.1% above analysts’ consensus estimates.
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Target (TGT) Q4 CY2024 Highlights:
- Revenue: $30.92 billion vs analyst estimates of $30.77 billion (3.1% year-on-year decline, in line)
- Adjusted EPS: $2.41 vs analyst estimates of $2.25 (7.1% beat)
- Adjusted EBITDA: $2.26 billion vs analyst estimates of $2.17 billion (7.3% margin, 4.2% beat)
- Adjusted EPS guidance for the upcoming financial year 2025 is $9.30 at the midpoint, in line with analyst estimates
- Operating Margin: 4.7%, down from 5.8% in the same quarter last year
- Free Cash Flow Margin: 7.7%, similar to the same quarter last year
- Locations: 1,978 at quarter end, up from 1,956 in the same quarter last year
- Same-Store Sales rose 1.5% year on year (-4.4% in the same quarter last year) (slight beat)
- Market Capitalization: $55.33 billion
"Our team grew traffic and delivered better-than-expected sales and profitability in our biggest quarter of the year," said Brian Cornell, chair and chief executive officer of Target Corporation.
Company Overview
With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE:TGT) serves the suburban consumer who is looking for a wide range of products under one roof.
Large-format Grocery & General Merchandise Retailer
Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.
Sales Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.
With $106.6 billion in revenue over the past 12 months, Target is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because there is only so much real estate to build new stores, placing a ceiling on its growth. To accelerate sales, Target likely needs to lean into pricing or international expansion.
As you can see below, Target grew its sales at a tepid 6.4% compounded annual growth rate over the last five years (we compare to 2019 to normalize for COVID-19 impacts) as it didn’t open many new stores.
This quarter, Target reported a rather uninspiring 3.1% year-on-year revenue decline to $30.92 billion of revenue, in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months, a deceleration versus the last five years. This projection doesn't excite us and implies its products will face some demand challenges.
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Store Performance
Number of Stores
A retailer’s store count often determines how much revenue it can generate.
Target listed 1,978 locations in the latest quarter and has kept its store count flat over the last two years while other consumer retail businesses have opted for growth.
When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.
Same-Store Sales
The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.
Target’s demand has been shrinking over the last two years as its same-store sales have averaged 1.8% annual declines. This performance isn’t ideal, and we’d be concerned if Target starts opening new stores to artificially boost revenue growth.
In the latest quarter, Target’s same-store sales rose 1.5% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.
Key Takeaways from Target’s Q4 Results
We enjoyed seeing Target beat analysts’ EPS expectations this quarter despite in-line revenue. For the full year, EPS guidance was in line, which seems good enough in a backdrop where the market frets over the health of the consumer. The stock traded up 2% to $123.28 immediately following the results.
Target may have had a good quarter, but does that mean you should invest right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.