Over the past week, a slew of traditional retailers have reported strong sales results for the November-December holiday period. Among major retailers, Kohl's (KSS 2.46%) posted the best results by far, with comp sales up 6.9% year over year. Clearly, investors need to rethink the common assumption that the rise of e-commerce will decimate most brick-and-mortar retailers.
However, even in the midst of this retail recovery, there has been a clear divide between mall-based department stores and off-mall retailers. Mall-based stores have posted relatively modest gains for the holiday season, highlighted by the 1.1% comp sales increase at Macy's, while large off-mall retailers have reported more robust sales increases.
On Tuesday, discount retail giant Target (TGT 0.70%) provided more evidence of this trend. The company reported strong sales growth for the holiday season and raised its guidance again.
Target bounces back
Entering 2017, Target's management had very modest expectations, because of a slowdown in store traffic along with rising price competition. In February, the company projected that adjusted EPS would fall to $3.80-$4.20 (from $5.01 in fiscal 2016) on a low-single-digit comp sales decline.
Entering fiscal 2017, Target expected its financial performance to deteriorate. Image source: Target.
However, Target has raised its guidance multiple times since then, as its efforts to get sales growing again have been more effective than expected. For the first nine months of the year, comp sales inched up 0.3% and adjusted EPS slipped just 6.2%, from $3.56 to $3.34.
As of mid-November, management expected similar sales trends but a "highly competitive" promotional environment in the fourth quarter. The company's guidance called for comp sales to move in a range from flat to up 2% and for adjusted EPS to come in between $1.05 and $1.25, down from $1.45 a year earlier.
Another off-mall retail giant sails past estimates
Target's holiday sales release revealed that comp sales rose 3.4% in the combined November-December period. The company expects a similar increase for the fourth quarter as a whole, which would result in full-year comp sales growth of about 1%.
While this holiday sales performance clearly doesn't match the stellar 6.9% comp sales gain at Kohl's, it's still a lot better than what mall-based retailers have been seeing. Furthermore, Kohl's has much higher exposure to online sales and discretionary purchases, giving it a natural advantage over Target in the current buoyant retail sales climate.
Based on its stronger-than-expected holiday sales, Target also raised its EPS outlook. It now expects to produce adjusted EPS of $1.30-$1.40 this quarter, including an $0.08 benefit from the tax reform legislation that recently went into effect.
For the full 2018 fiscal year, Target now expects adjusted EPS of $4.64-$4.74. Thus, EPS is still set to decline on a full-year basis -- but the decline will be just a third as severe as management had estimated last February.
Expect more good things in 2018
For 2018, Target plans to continue investing heavily in technology, fulfillment, store remodels, and new small-format stores. However, year-over-year comparisons will be much easier, especially early in the year.
Furthermore, as U.S.-focused businesses that have been paying the full statutory tax rate, Target and Kohl's are both poised to reap massive tax savings in the coming year. Both companies will get a small benefit in fiscal 2017 from their January results, but they are still in line to see an incremental EPS boost of at least 20% in fiscal 2018 related to tax reform.
Finally, with retail sales gaining momentum, it appears that off-mall chains such as Target and Kohl's could post their best comp sales growth in years during 2018. That will alleviate margin pressure by allowing them to spread their fixed costs over more revenue.
Target will undoubtedly continue to face headwinds in the future as consumers do more shopping online. However, the company's rapidly improving sales trajectory shows that Target is still a force to be reckoned with in the U.S. retail landscape.
