The good news is, expectations for the fourth-quarter numbers from Target Corporation (NYSE:TGT) this morning were low. The retailer had already warned owners of TGT stock that its November/December period was disappointing, with same-store sales falling 1.3%, and comps expected to fall between 1% and 1.5% for the full quarter ending in January.
The bad news is, even with downward-adjusted guidance, the retailer still struggled to meet those expectations. January’s results ended up being lackluster as well, with the top line still coming up short of estimates, and Target’s full-quarter same-store sales figure deteriorated to the worst-case scenario of -1.5%.
There’s little doubt as to how the market feels about Q4’s earnings. TGT stock immediately tanked 13% in premarket trade, and sellers have yet to look back.
The Headline Numbers
In its fourth fiscal quarter of last year, Target reported a profit of $1.45 per share on revenue of $20.69 billion. That was a disappointment versus analyst expectations for earnings of $1.51 per share of Target stock and revenue of $20.71 billion. It also was a letdown on a year-over-year basis — TGT earned $1.52 per share in the year-ago quarter on sales of $21.62 billion.
The company’s recent warning had suggested a profit of between $1.45 to $1.55 per share was in the cards, down from previous guidance of between $1.55 to $1.75 per share.
Even then, the results didn’t paint the whole picture.
Target Q4 Earnings Under the Microscope
In terms of absolute income, net earnings fell from $1.42 billion to $821 million last quarter. That year-over-year comparison is even more troubling than the per-share comparison, as the company continues on with a major stock buyback effort. Target reduced the total number of outstanding shares from 615.3 million shares of TGT stock a year earlier to 564.5 million as of this Q4’s end. All told, Target spent $5 billion on dividends and buybacks last fiscal year.
Further obfuscating the year-over-year comparison is the fact that the company sold its pharmacy operation — and access to in-store square footage — to CVS Health Corp (NYSE:CVS) a year ago, and the turbulence of the transition is still buffeting the accounting statements.
And of course, the proverbial X-factor with Target’s numbers is the impact of the company’s decision made last year to accommodate transgender patrons’ bathroom preferences, and the subsequent boycott by members of several conservative groups. The exact impact of that decision has been tough to quantify, but most observers agree it’s at least part of the reason Target’s top line has been dwindling for most of the past few quarters.
There were some bright spots. E-commerce revenue was up 30% for the November-December period, largely led by toys, and that tally grew by 34% when factoring in January’s activity.
Sales of electronics (in store and online), however, were a disappointment, as was the company’s bolstered effort sell more groceries, aiming to steal back business it was losing to Wal-Mart Stores Inc (NYSE:WMT) — a rival that did well last quarter.
Target’s grocery expansion has proven tough. Late last year, TGT reportedly saw perishables spoil on shelves before they were sold.
Another red flag: Although gross margins and net profit margins had been broadly improving, they didn’t do so in the fourth quarter. Target’s gross profit last quarter was 26.9%, versus 27.8% for the same quarter a year earlier. Net profit margins rolled in at 3.9% of revenue, compared 6.5% to on a year-over-year basis.
It remains to be seen if Q4 is the outlier to this trend, or the shape of things to come.
Why Commentary Matters
CEO Brian Cornell commented on the results:
“Our fourth quarter results reflect the impact of rapidly-changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores. At our meeting with the financial community this morning, we will provide detail on the meaningful investments we’re making in our business and financial model which will position Target for long-term, sustainable growth in this new era in retail. We will accelerate our investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment, including the launch of more than 12 new brands, representing more than $10 billion of our sales, over the next two years. In addition, we will invest in lower gross margins to ensure we are clearly and competitively priced every day. While the transition to this new model will present headwinds to our sales and profit performance in the short term, we are confident that these changes will best-position Target for continued success over the long term.”
That’s a lot of words, yet they say very little.
The longer the list of excuses and turnaround plans are, the more guilty the company is. Cornell knows he’s on trial now.
Also, in my experience, the more unnecessary adjectives used in a CEO’s comments, the more desperate he is to convince everyone that everything is going to be fine.
This is the kind of yammering one would expect from Sears Holding Corp (NASDAQ:SHLD) CEO Eddie Lampert. In fact, this is what Lampert said two quarters ago:
“We continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a net loss for the second quarter. We are encouraged by the year-over-year improvement in our Adjusted EBITDA and feel we are making progress in our transformation as we remain focused on our best stores, our best members and our best categories to drive our business and enhance the member experience.”
That’s an eerily similar “It’s not us — it’s them, but we know what we’re doing so there’s no need to worry” shtick.
The sharp selloff in TGT stock says investors weren’t fooled.
Bottom Line on TGT Stock
For the quarter currently underway, the retailer believes it will earn between 80 cents and $1 per share following another small same-store sales dip. Analysts had collectively modeled a profit of $1.33 per share sales of $16.22 billion, both of which were slightly up from year-ago levels; those figures will be adjusted now.
Target doesn’t see things improving later in the year, either. The Target earnings announcement suggested same-store sales for 2017 would again fall by single digits, leading to a profit of between $3.80 and $4.20 per share of TGT stock. The pros were calling for earnings of $5.34, on average.
Also on Tuesday, and as was noted, the company is hosting its annual analyst day event in conjunction with its Q4 earnings call. This is a more open-ended discussion than just a look at last quarter’s numbers, and as such may be of particular interest to current and would-be owners of TGT stocks. Undoubtedly, competition and execution issues will come up, and prove enlightening. The company has a lot of repair work to do, too, following Tuesday morning’s news and the subsequent response in TGT stock.
It’s not clear if Cornell truly knows how to fix what’s broken.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.