This week marks the tail-end of the 2014 fourth-quarter earnings season. Ten retailers from the S&P 500 report this week, and nalysts are eager to see if the sector got a push at the end of the year from the holiday season and the dramatic drop in gas prices across the nation. These two factors were expected to be a catalyst for middle and lower-class consumers and the retailers that service them.
Just look at Wal-Mart Stores, Inc. (NYSE:WMT) stock last week. It beat Wall Street estimates by increasing foot traffic and online sales in Q4 2014 — thus increasing revenue.
Well, could the Target Corporation (NYSE:TGT) — the U.S.’s second largest general merchandiser — follow suit as it gets ready to announce its fourth-quarter numbers tomorrow morning?
The problem with TGT is that the earnings numbers for the fourth quarter won’t tell the story of where Target stock has been and the uncertainty it faces. Can the real story be about a new CEO and a failed endeavor in Canada that no one can explain?
Actually … yes.
A New CEO, An Announcement and Some Numbers
Target got new CEO Brian Cornell back in the summer of 2014 to turn around the company’s performance and lead it into the era of omni-channel retailing. In short, omni-channel retailing is the concerted effort to streamline the consumer experience through all available shopping channels, such as mobile Internet devices, computers, brick-and-mortar, television, radio, direct mail, catalog and so on.
Last month, Cornell announced that TGT is closing all of its Canadian operations — a division he was brought on to turn around. They are closing 133 stores and laying off more than 17,600 employees after the two-year experiment proved fruitless.
After the announcement, Target revised its earnings outlook higher because of a stronger than expected holiday season. Analysts expect Target earnings for Q4 to come to $924.63 million — which translates into earnings per share of $1.46 — on revenue of $21.64 billion. That is up from the year-end numbers in 2013 of a net income of $611 million — earnings per share of 90 cents — on $21.52 billion of revenue.
Target also forecast that digital sales would surge past 40% of its revenue for the 2014 fourth quarter.
TGT: More Interested in Management’s Answers?
These numbers do not tell the real story. What we need to know is how the changes made in a turbulent 2014 will affect the outlook and bottom-line for 2015 and beyond — especially what happened in Canada and how its closure will make your domestic business better.
Cornell was brought in to fix the Target Canada fiasco and its supply-chain issues. After six months the entire endeavor was scrapped. Why? Was it just such so ill-properly planned and executed that no one could fix it or would it have just taken too long as to be too much of a burden on the books?
Target has stated it expects to report about $5.4 billion of pre-tax losses for Target Canada in the fourth quarter so they can write down the investment. The cash costs to scrap the project will add up to about $500 million to $600 million. This cost will show up for fiscal 2015 and beyond. most of which will occur in the Company’s 2015 fiscal year or later.
I know the initial launch was not on his watch. However, what did he see that lead to the decision that Target Canada was not feasible. It’s rumored that Walmart is heading north of the border to try their hand at establishing general merchandising footprint. If WMT succeeds where Target could not, it’s a black eye for TGT management.
Bulls of TGT stock will point to new resources concentrated on U.S. stores and omni-channel retailing, the U.S. economy and low gas prices as factors for positive guidance.
However, I believe Cornell needs to prove that he can be innovative in getting customers buying online and also increasing foot traffic in stores before we can believe that TGT stock will make any significant moves.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.
