This morning, investors’ fears were confirmed when Target Corporation (TGT) reported first-quarter earnings before the opening bell.
Despite posting higher-than-expected earnings of $1.29 vs 1.19 expected, revenues came in lower than expected at $16.2 billion against $16.3 billion expected.
Moreover, comparable sales, a key indicator of growth for retailers, grew by merely 1.2%, below the 1.6% expected according to Consensus Metrix.
Target also lowered guidance for comparable sales in Q2, outlying flat growth to a possible 2% contraction. What’s more, expected second-quarter EPS of $1 to $1.20 is far below the consensus for $1.36.
The results leave us with a bitter taste. Target did not weather the storm very well and was hit by weak retail sales, as feared.
So while Target did conquer the Street’s per-share estimates, it was due to cost cutting rather than growth. And a retail stock without growth is like a plane without wings, which is why TGT stock took a brutal plunge before the market opened.
TGT Stock: Not All Gloom and Doom
True, growth numbers from Target are weak, but it’s online sales via its REDcard have continued to grow at a healthy clip, gaining 23% year-on-year. Moreover, online sales have taken a bigger portion of the revenue mix, contributing 0.6% to comparable sales growth.
Another bright spot is Target’s improved margins. Cost cutting efforts have been rather broad, with SG&A expenses falling to 19.4% of revenues and EBIT margins rising from 7.4% to 8.2%. Once again, cost cutting cannot replace growth for a retailer but it also means that when growth returns to TGT stock, it will benefit shareholders much more than before.
Target might not weather a storm as well as Wal-Mart Stores, Inc. (WMT), but as it now looks, TGT continues to have higher margins, making it an even better play for when times are good.
Watch Retail Sales
Despite the 8% plunge, TGT is slightly expensive now. Trading at nearly 13 times earnings, Target stock trades at roughly the same premium as its much bigger and more resilient peer, Walmart. But if times turn good again, that will be a different story, as Target will have the advantage of higher growth potential and better margins.
Target’s downbeat forward guidance and comparable sales growth should be taken with a grain of salt. The reason? Retail sales. Retail sales have been a great barometer for Target’s current revenue miss and it could be a great barometer for a possible beat in the next quarter.
So far, the first retail sales figures in Q2 have been somewhat encouraging with retail sales for April growing by 1.3% over the previous month. If retail sales continue to shine in May and June, we could get a surprise from Target.
Without hard data, however, we are left to focus on Target’s soft sales and expensive valuation, hardly ideal for investing.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
