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Target Corporation’s Bathroom Blunder (TGT)

I think the shareholders of every public company should get together, and at the next annual meeting, hit every Board of Directors with this resolution: “Do not get involved in social political issues. Ever!”

Target Stock Bathroom Blunder (TGT)

I’m talking to you, Target Corporation (TGT).

By making a big public announcement that transgender individuals may use the bathroom of their choice, TGT needlessly got involved in a social issue that is presently blowing up in its face. Target stock has fallen from $83.50 to $67 since it announced its policy on April 19.

We all know that we rarely can peg a stock’s movement to one given element or another, so we cannot conclusively say the Target stock decline is a result of this misguided play. It is likely that at least some of the first $10 decline in Target stock (prior to earnings), however, is the result of the boycott that has ensued against the company.

TGT Should Have Kept Quiet

No matter what the position of the CEO or the Board of Directors may be on any given social issue, they should keep it to themselves.

The reason is simple: going public with those views has no upside. None. Zip. Zero. All it will do is antagonize half of the company’s customers, and turn the focus from operations to something totally irrelevant. It distracts management. It hurts employee morale.

From a communications standpoint, there is absolutely no reason for the company to make some big public announcement, either. Send out a private message to store managers regarding policy. Roughly 0.3% of Americans consider themselves to be transgender, so the likelihood that an issue arises in store is miniscule, and if a protocol has been set up, no problems will arise.

Please note that I reference “social issues”, because obviously most companies need to engage in lobbying and support candidates that will be more friendly to their business.

It’s particularly foolish in a period where retailers are struggling, and when Target management had to know it would deliver lousy earnings for Q1. Revenue declined 5.4% year over year, despite a 1.2% increase in same-store sales. Target tried to financially engineer earnings by repurchasing almost $900 million in stock during the quarter, to lift EPS by 16.5%.

That’s why you must always look to actual net income to see how TGT and other companies truly performed. Here, you’d find a decline of about 0.5% in net income. Now you see the power of buybacks, and how foolish they are for shareholders.

TGT is seeing lousy comps, revenue declines and flat earnings, yet they think the stock is soooo cheap that they are spending shareholder money to repurchase stock?

It’s also a poor use of TGT’s $4 billion of cash on hand. It’s burdened by $12.5 billion in debt, and pays about $1.6 billion of interest per year on it — that’s an insane rate of almost 12%. I’m supposed to believe that conserving 12% of capital via interest is a worse deal than buying back $900 million of stock that is clearly overvalued?

No wonder they had to make the bathroom announcement. Anything to distract from this poor management.

So, yes, I think now would be a good time to sell TGT.

As of this writing, Lawrence Meyers had no position in TGT.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/target-stock-tgt-bathroom-blunder/.

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