Well, apparently Target (TGT) and I both underestimated the impact a chilly spring can have.
It was about a month ago when Target first pointed to weather as a problem, lowering its earnings expectations and predicting flat same-store sales for its fiscal first quarter … and around the same time, I shrugged it off.
Heck, I even thought it could be a good thing — worries like this could lower the first-quarter earnings bar for retailers, thus making it easier for them to clear.
Yesterday, Target posted Q1 profits of 77 cents per share that represented a 26% year-over-year decline and missed already-lowered expectations. The quarter was so bad, Target slashed its full-year outlook from a range of $4.85 to $5.05 to a range of $4.70 to $4.90.
Unsurprisingly, TGT shares shed around 5% on the news. And yet — maybe surprisingly — I’m still not worried.
Yes, a 26% slide in earnings isn’t anything to cheer. And yes, I do tend to roll my eyes at scapegoating weather for subpar numbers. Wall Street treats the weather like most of the world treats referees — you hear nothing when things are good, but there’s blame aplenty when things hit the skids.
Just look at some other massive companies blaming Mother Nature for their woes:
- Walmart (WMT) missed expectations last week thanks to a mere 1% revenue increase. The company cited the cold and late tax refunds for soft sales.
- Lowe’s (LOW) posted flat sales and a 0.7% fall in comparable-store sales. Getting the nod was more rain and less warmth, which hurt exterior categories.
- Gap (GPS), which reports after the bell today, is expecting a mere 2% improvement in same-store sales. Thanks a lot, chilly March.
But for investors with a long time horizon, I still think it holds that bad weather is the best kind of bad news there is.
As I said before, shopper demand has to trickle out sometime. Real-life purchases aren’t defined by three-month earnings periods or supposed start dates to the seasons. Cooler-than-usual temperatures might have discouraged shoppers in the first quarter, but as the cliché goes, life goes on — and so does shopping. Seasons change, and you and I eventually will buy the bathing suit, grill, gardening supplies and so on that we planned on buying in the first place.
Thus, the fact that retailers are suffering because of outside forces (literally) is hardly a reason to go running from the sector. In fact, I think the rain and chill have made a perfect storm for long-term investors: the opportunity to buy on a dip.
However, rather than jumping into one of these individual names, you might instead consider a retail exchange-traded fund. These ETFs provide you with exposure to a basket of stocks for a fractional expense — far more appealing than buying every single stock yourself and eating up all kinds of trading fees from your brokerage account.
A couple options include the Retail SPDR (XRT) or Market Vectors Retail ETF (RTH), which each shed around 1% on Wednesday and were wavering today.
The XRT still gives you exposure to companies like Target and Gap if and when the pent-up demand finally does boost their sales, but in the meanwhile, you’re cushioned by a plethora of other names — Francesca’s (FRAN), Dollar General (DG), Rite Aid (RAD) and more — in case things don’t warm up as soon as you’d like.
The RTH takes this a step further. While holdings Walmart, Lowe’s and Target have all been blaming bad weather for their woes, Home Depot (HD) — the fund’s second largest holding — actually has a penchant for performing well in the wake of major storms.
And each of these provide both a targeted play on retail and instant portfolio diversification for small expense ratios of just 0.35% each — or just 35 cents of each $100 invested.
Bottom line: Don’t freeze your retail investments just because the calendar year got off to a cool start and is now taking a few stocks with it. Weather the storm by bundling up.
As of this writing, Alyssa Oursler was long RTH.