Last week, Target Corp. (TGT) reported stronger than expected earnings and revenues. This sent shares of TGT higher as investors were pleased with the outperformance, but we’ll take a closer look at these Q3 2016 results a bit later in this publication. Target’s 3rd quarter adjusted EPS was $1.04, 22.1% higher than last year and well beyond the high end of the guidance range of $0.75 to $0.95 the company had previously offered.  Additionally, earnings beat estimates by $.21 a share according to FactSet. The earnings outperformance came with $16.44B in revenues (-6.6% Y/Y) that beat estimates by $140mm. Such a significant beat on top and bottom-line signal that Target simply lowered the bar too much and jumped over that very low bar/guidance. Digital sales grew more than 26% in the 3^rd quarter and they have grown more than 20% year-to-date. The digital sales growth represents a reacceleration of digital sales growth that is now on par with Amazon’s (AMZN) reported digital sales growth.

Moreover, digital sales added some 70bps to the total sales comparison. Another strength during the quarter, partially as a result of eliminating the low margin pharmacy business segment, was gross profit margins.Gross margins improved about 80 basis points in the 3^rd quarter compared to last year, which was much stronger than expected.

But with the good there is still some bad in Target’s results. Comparable sales declined 0.2% in the 3^rd quarter and marks a second consecutive quarterly decline. On the bright side, this reported result is a full percentage point better than the 2^nd quarter performance and near the high end of Target’s guidance range.With the removal of pharmacy and clinical sales from this year's results, total sales were down nearly 7% in the quarter. Among the components of comp sales, transactions were down 1.2% in the 3^rd quarter representing lower foot traffic that has plagued the retailer.

Based on the reported 3^rd quarter results, it would appear as though Target is heading in the right direction. Unfortunately, when we look under the hood we come to find that Target will exhibit 2 consecutive years of sales declines.In 2015, Target’s sales comparison was hurt due to the company exiting the Target Canada business operation in total. This year the company is still witnessing sales decline and in part because of the sale of its pharmacy business.When we analyze the actions taken by Target, for several years now, we come to find that most every business operation the company embarks on, fails in part or in total.The examples are numerous and I’ve bulleted a few below:

• Global Bazaar
• Lawn & Garden
• Grocery
• P-Fresh
• Electronics & Entertainment
• Target Canada
• Target Pharmacy

In fact, the continued asset sales that Target has executed highlight the company’s inability to manufacture long-term sales growth.Earnings are not the issue with Target as the company generates outstanding cash flow, but sales continue to be a problem for the company.Revisiting asset sales, such actions have served to uplift Target’s earnings and balance sheet in recent years with the sale of the credit card division in 2013 to TD Bank.  Of course, by exiting Target Canada in late 2014 the company’s FY15 earnings results were artificially uplifted absent the expense of operating Target Canada.And in 2015 the company sold another asset in its pharmacy business to CVS Corporation (CVS ).The closing of business segments, perpetual gross margin drain on total profits from the grocery business and asset sales highlight the issues that malign Target’s business. These are all reasons that Target embarked on a $2bn cost reduction in 2015. To Target’s credit, the company has accomplished this goal and has offered further cost reductions are to be achieved. Such additional cost savings may also serve to improve earnings per share in the future.

Did you know that if you invested in shares of TGT two-years ago, just prior to Thanksgiving Day, your shares would have appreciated less than 5 percent to date? If one includes the dividend, the pre-tax performance is roughly 8.5 percent.Not quite the double-digit performer that investors would like to participate with.

Additionally, the chart above shows just how volatile shares of TGT have been over the last 2-year period.TGT shares have been a better stock to trade than to own given the volatility.From peaks to troughs and back to peaks, investors could have made 20% or more by trading shares post good and bad results and in either direction as indicated in the chart.

For investors or long-term shareholders, an 8.5% return on capital invested in TGT and in an extremely difficult retail environment is not bad for a retail stock. Given where the economy is though, some 8 years into a bullish economic cycle”, what is more likely to occur for Target and TGT shares in the coming years?That’s the question investors should consider going forward and with the reality of negative sales growth that Target continues to produce. Having said that, again, the earnings outlook looks positive near-term. 

Earlier this year, Target’s Board of Directors approved another $5bn share repurchase program.In the 3^rd quarter, TGT repurchased $878mm in shares. Year-to-date, the share count is down roughly 8.6%, which has helped with the company’s EPS performance.Now let’s take a look at Target’s guidance.

Target is planning 4^th quarter comparable sales to be roughly consistent with the 3^rd quarter performance, in a range of -1 to 1 percent. Total sales are expected to decline about 3% in the 4^th quarter, reflecting the removal of pharmacy sales from this year's results. GAAP EPS from continuing operations and adjusted EPS in the range of a $1.55 to $1.75. When combining the 4^th quarter expectations with the year-to-date performance, Target is expecting to generate approximately flat comp sales for 2016, and full-year adjusted EPS in the range of $5.10 to $5.30.

Given Target’s struggles with sales growth, foot traffic and the grocery business, the sales outlook, at best, may show slight improvements if the economy improves in kind. Earnings are likely to be underscored by cost reductions and share repurchases. Investors may see shares of TGT peak around $80 a share before retracing, but as we head into an interest rate hike, near-term price movement is anybody’s guess. Target remains a relatively cheap stock when compared to its peers at roughly 14 times forward-looking earnings.