No Bullseye for Target: Q2 Earnings Review
On August 19, before the market open, Target Corp. (TGT) reported earnings of $0.82 per share or $634 million, down 7.6% from $686 million a year ago (see conference call transcript). Analysts expected earnings of $0.76 per share. The original consensus was $0.79 in May, however, TGT warned of a profit miss then. The retail unit grew sales to $15 billion, up 5.7% compared to $14.2 billion a year ago. Shares spiked in the morning, but sold off sharply to close at $9.72, down 0.7%.
Perhaps TGT should reevaluate their cardholders’ credit worthiness since the losing shot came from the credit card unit. The unit’s receivables dropped 19.8% to $3.6 billion from $4.5 billion a year ago caused by debt expenses and higher write-offs. Profitability dropped 65%. The effects of delinquent credit-card payments on purchases and reduced consumer spending can be clearly seen in same-store sales, which declined 0.4%. TGT has suffered as only 1/3 of their merchandise is consumer product based vs. 55% for competitor Wal-Mart (WMT). Consumers continue to allocate income more toward essential purchases. Wal-Mart remains as the largest threat to TGT, and I expect TGT to lose market share given the intense price battle and competition within the retail industry. Unfortunately, the tagline "Expect More, Pay Less"” just didn’t cut it.
TGT also revised their outlook on new store openings, reducing the number to 75, instead of 95, and cutting $1 billion in capital investment going forward into 2009. Original expansion plans would have added around 7-8% in retail space. Effects of the housing downturn and the credit crunch can be seen here as commercial real estate developers, particularly for strip malls, are unable to access credit. States such as California, Arizona, and Florida (which make up 25% of TGT’s retail space) are included in the 2nd highest bracket for sales per capita by state which shows that TGT’s recovery will not occur anytime soon unless the housing and credit markets improve..
Words from the CEO himself:
The current environment is the harshest we have seen in many years, and with inflation growing at its fastest pace in almost two decades, we do not see any indication of meaningful near-term improvement.
Threats to TGT, besides the weakening economy, include increased competition, markdowns on discretionary purchases, higher marketing costs, capital investment, and continued credit-card delinquencies. I don’t see much improvement in the near future.
I would like to see an increase in consumer products, mostly food-related to drive traffic to stores, but higher costs due to a continued high level of inflation will make it nearly impossible for TGT to show a sustained profit in that unit. Therefore, aggressive marketing may be the key factor in sales. In 2007, NPD, a retail industry research firm, reported that TGT captured 20% of apparel sales. This number should increase as more and more department stores lose market share (department store retail sales accounted for 16% and falling).
Currently, 21 analysts publish recommendations for TGT. There were 8 “Buy” ratings, 10 “Hold” ratings, 2 “Sell” ratings, and 1 “No Opinion” rating. On Wednesday, August 20, Goldman Sachs reinstated TGT with a “Buy” rating and giving the company a target price of $56.
In Q2, TGT repurchased 33.8 million shares for a total of $1.7 billion. In the past 12 months of insider transactions, there have been 0 purchases and 79,874 shares sold. Also in the past 12 months, institutions have sold a net 50.5 million shares, a -25.8% net change in ownership. Institutions own 94% of shares vs. retail industry avg. of 58.2%. The July short interest is at 6.36% or 49.5 million shares outstanding, 10% higher since May, whose short interest was 5.71% or 44.4 million shares outstanding.
Technically, TGT is still in a primary downtrend since mid-2007. TGT appears to most likely trade in a sideways fashion for several months due to several resistance levels up ahead as well as the $42 July low support. I suggest no trade unless TGT fails the 200-day MA entirely (short) or if TGT is in a confirmed uptrend and under accumulation (long).
Disclosure: none
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