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Target Corporation (TGT) Stock Is Even Worse Than Q4 Earnings Suggest

The struggling retailer hit a stronger headwind in its recently completed quarter, suggesting TGT stock has yet to find a winning formula

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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.

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