Investors looking for clues about how the make-or-break holiday shopping season will play out could find early warnings in Target (TGT) earnings, which are due out Thursday. And if things pan out as expected, TGT stock could be in for a dive.
The Target earnings report, coming just a week before the official kick-off of the most important shopping month of the year for retailers, is expected to show ugly declines year-over-year. Analysts expect Target earnings to tally about 63 cents per share of TGT stock — down markedly from 81-cent Target earnings per share a year ago.
So far, retail earnings and sales trends for the most recent quarter have been mixed, making it tough to know how TGT stock investors will react to falling Target earnings.
Full-year profit outlooks and same-store sales growth slipped at TGT rivals Walmart (WMT) and Kohl’s (KSS). In the upscale niche, Macy’s (M) rocked its quarterly earnings last week, but Nordstrom’s (JWN) earnings dropped.
So why are analysts expecting Target earnings to fall 22% year-over-year? Let’s take a closer look.
TGT Stock Could Be in Trouble
To sum it up, there are a few quick reasons why Target earnings could suck … and why TGT stock could slip as a result on Thursday. Here are three of them:
- Cautious consumers. While high-income shoppers largely have rolled with adversity like the federal government shutdown, sequestration and sluggish economic growth, lower and middle-income shoppers are nervous. That caution is making them more frugal — and could thus weigh on Target earnings and TGT stock. Consumers are spending more on large-ticket items like homes and vehicles, but consumer credit is still tight. As Obamacare kicks in, consumers increasingly are worried that their health insurance costs will rise — or that some employers will reduce employee hours to escape the coverage mandate. A sign of tightening purse-strings could give Target stock investors the jitters before the holiday season.
- Chilly reception in Canada. TGT made a bold foray into Canada this year, and it could eventually be a driver of growth for Target stock. But for now, the expansion is weighing on Target earnings. The company, which has opened 91 stores so far this year and plans an additional 33 by year’s end, has struggled with everything from higher costs to empty shelves so far. TGT had hoped the Canadian stores would post a profit this year, but that target has now been extended to the fourth quarter of 2014. Plus, TGT has had to build a new supply chain infrastructure and massively redesign the stores formerly owned by Canadian discount chain Zeller’s. And TGT drew the ire of United Food and Commercial Workers union earlier this year, which said the retailer reneged on a promise to hire the former Zeller’s workers for the new TGT stores.
- Continued impact of credit card portfolio sale. TGT completed the $5.7 billion sale of its U.S. credit card portfolio to TD Bank (TD) in March. The deal does not impact Target’s 5% REDcard Rewards program or directly affect cardholders, but Target earnings are still feeling the pinch. In the second quarter, for example, TGT received $183 million in profit sharing from TD, which was partly offset by about $65 million in servicing costs. When compared to the $217 million TGT earned from the portfolio in 2012, the nearly $100 million difference makes a significant mark.
Bottom Line for TGT Stock Investors
Target earnings are likely to be pressured by two types of headwinds: sector headwinds and retailer-specific headwinds. Plus, the Canada expansion and reduced profit from the credit card portfolio are likely to weigh on Target stock in the near term as well.
Taken together, those are good reasons to wait for the January clearance sales before buying TGT stock.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.