Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Earnings: Target's Sprayed Bullets


It seems the near-term focus should concentrate on the pressure points on Target's business.


To be honest, I'm having a tough time developing a feel for the litany of clues Target (TGT) has brought to the table today. The early action in the stock prompted a head-scratching moment by yours truly.

Quality of earnings
Target printed $1.49 per share (consensus: $1.40 per share) on an adjusted basis. The stock popped pre-market in response. But how good was this beat in actuality? I have my reservations:

  • Target came out and lowered its fourth-quarter guidance intraquarter, rather meaningfully in fact. So about a month of sales following that warning led to a sizable beat? Or, was management trying to go with the crowd and drop guidance in the hopes of reaping the rewards (higher stock price) when the real earnings hit the wires later on? Credibility loss here.
  • Gross margin clearly is on a downtrend as Target sells more consumable goods. The saving grace for 2011 was the tight lid kept on operating expenses. How tight was that lid, though? Remember that Target's US retail stores charge its credit card business (related to 5% RedCard loyalty program launch), which has the effect of lowering retail segment expenses.

What to believe?
On an adjusted basis, Target issued guidance of $4.55-$4.75 per share, unadjusted $4.05-$4.25, which includes Canadian store build-out expenses. Since Canada will be an ongoing operating expense, last time I checked, shouldn't investor/Street attention be more focused on the unadjusted earnings (which were below consensus)?

Gun to head, I think near-term focus should be on the pressure points on Target's business. The areas of financial pain include a rapidly evolving gross margin with fewer positive offsets, soft traffic amid a consumer spending rebound (as implied by number of transactions metric), and a balance sheet that is incurring debt to fund the future.

Bigger picture thought: Is Target losing market share?
This week has brought news that Wal-Mart's (WMT) domestic store traffic increased in the fourth quarter, a noticeable reversal in fortunes from earlier in the year. Moreover, Dollar Tree (DLTR) stated its 7% same-store sales increase was a function of new customer wins and overall, higher levels of traffic. Since the US consumer continues to consolidate store trips, when I observe Target's operating metrics it would appear it may be the odd man out. Zero in on the number of transactions for the quarter and the year, and then recognize that the closely watched same-store sales number was driven by transaction amount, which was influenced by inflation throughout the assortment.

The Real Deal on Target Is in the Numbers
Item 4Q11 4Q10 FY11 FY10
Same-Store Sales +2.2% +2.4% +3.0% +2.1%
Number of Transactions +0.4% +1.6% +0.4% +2.0%
Avg. Transaction Amount +1.8% +0.8% +2.6% +0.1%

For more on Target, see Why Target Is a Buy Right Now by Ronald Thomas, CFA.

No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Featured Videos