What to Look for When Target Reports Earnings on August 17

By Markets Fool.com

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Image source: Target.

Target (NYSE: TGT) announces second-quarter earnings on August 17. The stock dipped as much as 20% after reporting a lowered outlook for the spring and early summer months, but it has started to rebound leading up to the next report. What should investors look for during earnings and management's discussion of business results?

Setting the stage for the last few months

Investors were disappointed by the big-box store's results released in May. Quarterly profits came in above the company's guidance, but revenue decreased year over year by 5.4% thanks to last year's sale of the pharmacy business.

Target's profits were higher thanks to increases in key segments. Most notable was a 23% increase in digital sales, a total comparable-sales increase of 1.2%, and growth in the company's higher-than-average profit "signature" categories: Style, Baby, Kids, and Wellness.

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Overshadowing the positives was a downgraded outlook for the second quarter. Management expects comparable sales to decline as much as 2% during the quarter and profits to come in as much as 18% lower than last years. These forecasts reflect difficulties in the retail industry as many of Target's competitors are in heavy discounting mode to keep e-commerce from taking away market share.

What to look for

A key component to Target's results for the last couple of years has been the progress of its small but growing online store presence. The company has been able to eke out six straight quarters of traffic growth in a row, in large part thanks to increasing internet sales.

Period

YOY Internet Sales Growth

1Q 2016

23%

2015 Fiscal Year

31%

2014 Fiscal Year

30%

Data source: Target quarterly earnings results. YOY = year over year.

Investors should look for continuing double-digit growth numbers in online sales ascomparable sales have been positively impacted by that metric. Back in 2014, the company set a lofty goal of 40% internet sales growth. While numbers that high haven't been achieved to date, the company continues to highlight it as a key area of strength going forward.

Along with the increased promotion of the website, Target has also been investing to upgrade and modernize its inventory and order fulfillment capabilities. Efforts include streamlining the pickup-in-store and ship-to-home ordering options to decrease delivery times to customers and increase profit margins. Management also reported that self-checkout lanes will also be rolled out this year. Progress on these initiatives and how they're impacting the bottom line should receive some attention.

Strength in signature collections Style, Baby, Kids, and Wellness should also be noted. Sales of the company's proprietary lineups have been on the rise. Target sold off its pharmacy business last year, and while it impacted total sales, the company feels that refocusing on the higher profit margin signature segments will pay off down the line.

Finally, company guidance was to expect a weak second quarter with earnings per share between $1.00 and $1.20, representing as much as an 18% decrease year over year. Despite the poor outlook, CEO Brian Cornell expressed belief that full-year profit growth was still in the cards, implying a strong second half to the year that would offset the second quarter.

Full-year guidance included comparable sales growth of 1.5% to 2.5% and earnings per share at $5.20 to $5.40, representing a range of a 1% decline to a 3% increase over 2015's numbers. Investors should look for confirmation that those expectations are still achievable if the second quarter comes in weak, as forecast.

What investors should do

Given weakness in Target's stock over the last few months, I believe it's time for investors to put the company on their watchlists. The big-box store business is old and boring, but the company has been making great strides in mixing in online sales to keep up with the likes of Amazon (NASDAQ: AMZN).

Barring the company downgrading its outlook for expanding its internet presence or comparable sales for the full year, Target is worth keeping an eye on when results are posted next week.

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Nicholas Rossolillo owns shares of Target. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.