Target Corporation’s Cool Outlook Limits Upside in TGT Stock

Target Corporation (NYSE:TGT) exceeded Wall Street’s profit views for the all-important holiday selling season, but — in a familiar retail theme — the outlook for upcoming sales was muted, tamping down any celebration for TGT stock.

target earnings, tgt, target stock, tgt stockTarget Corporation is in the midst of a self-proclaimed transformation as it tries to re-accelerate sales growth after a prolonged slump. Indeed, TGT was been struggling to right itself even before it suffered a massive data breach at the end of 2013 and its disastrous expansion into Canada.

As for the latter problem, TGT said Wednesday it will take a pretax charge of $5.1 billion to exit Canada after two years of futility. Management said they saw no scenario in which Target Canada would achieve profitability by its goal of 2021.

It was a horrendously costly mistake, but it’s ultimately good news for anyone holding Target stock. The distraction of the Canada debacle took resources and attention away from Target’s real problem, which is re-building traffic and sales, especially after the terrible holiday season it suffered in 2013.

As far as those efforts go, TGT is making decent progress. Same-store sales are a critical measure of a retailer’s health, and in Target’s case, they grew 3.8% during the holiday quarter. That was ahead of the company’s already upbeat forecast for same-store sales growth of 3%.

Net sales showed even more bounce to beat Street estimates. For the most recent quarter, net sales grew 4.1% to $21.8 billion. Analysts surveyed by Thomson Reuters were looking for sales to hit $21.6 billion.

The massive charge for exiting Canada threw Target for a net loss. The bottom line fell into the red by $2.64 billion, or $4.10 a share, versus year-ago profit, but results looked better on an adjusted basis — and that’s all the market really cares about.

Excluding the Canada charges, earnings came to $1.50 a share, which beat Target’s own forecast of $1.43 to $1.47, as well as analysts’ average estimate of $1.46.

TGT Investor Day Is Key

Although TGT made important progress at the end of last year, the holiday selling season is now ancient history, and a soft forecast is clearly weighing on market sentiment. After Target stock spent the morning following the earnings report flirting with small gains and losses as it remained essentially unchanged.

For the current quarter, Target forecast earnings of 95 cents to $1.05 a share, versus a Street forecast of $1.04 a share. Target will host an investor day next week to fill in the blanks on the upcoming year, which will also likely restraint Target stock from doing much in either direction in the very short term.

Target is on the mend but it still has a long way to go in a very tough time for retail. Gas prices are stuffing consumers’ pockets with cash, but they’re not spending it as expected. Indeed, the spending that is taking place is going more to cars, healthcare and paying down debt than clothes and the other types of discretionary items offered by a discount retailer like TGT.

TGT made a big move at the end of last year in anticipation of improved results, and fourth-quarter earnings confirmed the market’s wisdom — at least in this case.

Anyone holding Target stock will have to wait for the investor day to get a better sense of where it goes from here, but it’s fair to say it’s not going to blast off anytime soon.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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