Can Target Keep Hitting the Mark for Earnings?

Earlier in the quarter, both Target and CVS Health Corp. (NYSE: CVS) announced a definitive agreement in which CVS will acquire Target’s pharmacy and clinic businesses for roughly $1.9 billion. Specifically, CVS will acquire Target’s 1,660 pharmacies across 47 states and operate them through a store-within-a-store format, branded as CVS/pharmacy.

Going forward, CVS will operate pharmacies within all new Target stores that offer pharmacy services. Target’s nearly 80 clinic locations will be rebranded as MinuteClinic, and CVS will open up to 20 additional clinics in Target stores within three years of the close of the transaction. The new clinics will be part of CVS/MinuteClinic’s plan to operate 1,500 clinics by 2017.

If this transaction was only valued at the pharmacy level, CVS would be paying about $1.14 million per pharmacy, which is relatively cheap. Target looks to benefit from this too, as this is a significant cut to its overhead. This is also a welcome boost to the balance sheet; the previous quarter had $2.77 billion in cash and cash equivalents. This moved up from $2.21 billion in January 2015 and $780 million in November 2014.

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In the fiscal first quarter earnings report, Target noted that it returned cash through share repurchases for the first time since the second quarter of 2013, with purchases of $562 million in shares of common stock in the first quarter. Including dividends, the company returned $895 million to shareholders in the first quarter, more than 140% of net income.

Target also incurred breach-related expenses of $3 million in the fiscal first quarter, compared with $18 million of net pre-tax expense last year. Since the fourth quarter 2013, Target has incurred net expense related to the data breach of $166 million, reflecting $256 million of gross expense, partially offset by the recognition of a $90 million insurance receivable. These costs are looking to persist into this quarter as well.

Analysts weighed in on the retail giant ahead of its earnings:

• Deutsche Bank reiterated a Hold rating with an $82 price target.
• BMO Capital Markets downgraded Target to a Market Perform rating from Outperform with an $85 price target.
• S&P Equity Research reiterated a Hold rating with an $83 price target.

Shares of Target were up 0.8% at $79.59 on Tuesday afternoon. The stock has a consensus analyst price target of $83.65 and a 52-week trading range of $58.25 to $85.81.

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