Target Corporation’s (NYSE:TGT) stock fell after earnings missed analyst estimates. Analysts had been expecting earnings of $1.38 per share, and hoping for $1.40 per share, on revenues of $22.46 billion before the numbers came out March 6.
What they got, after adjustments, were earnings of $1.37 per share. Revenues came in at $22.77 billion, $300 million ahead of estimates, and the company issued positive guidance, saying earnings per share for the current quarter could come in at $1.25-1.45 per share, with a low single-digit increase in sales.
Why then would the stock fall, when earnings came within a few cents of estimates and revenues were ahead?
Blame it on the poor, and Target’s willingness to treat its retail employees a little better.
Most business reporters, identifying entirely with their executive readers, see raises for management or share repurchases as positive for the economy, and a few more pennies in the pay packet as negative.
But Target, facing more competition in the labor market, did raise employee pay. It also put more money into new brands like the Cat & Jack kids’ line, into store remodeling, and into new urban locations that distinguish it from Walmart Inc (NYSE:WMT). The company also held the line on prices and improved its online shopping experience.
The moves seem to have paid dividends. Online sales were up 29% year-over-year. Comparable store sales were up 3.6%. It also made a big bet on toys, a winning bet due to the bankruptcy of Toys R Us.
Despite this, Target shares are also in the bargain bin. They trade at a price to earnings ratio under 16, and the 62 cents per share dividend, easily affordable after earnings, comes to a yield of 3.3%.
Yet all CNBC could talk about was those wage hikes cutting into profit. Those wage hikes, like those previously at Walmart, are going to come back in the form of increased purchasing power, of which Target is bound to get its share. Costco Wholesale Stores Inc. (NASDAQ:COST) doesn’t seem to suffer from treating employees well.
The wage hikes also show that, finally, consumers are getting some benefit from the growth of the last decade. The money going to share repurchases and dividends — $2.4 billion during fiscal 2018 – is going on top of a groaning pile of capital competing for opportunities that result from those wage hikes and other investments.
You would think reporters were paying Target’s wage hikes out of their own pockets.
The Bottom Line on Target Stock
The bottom line is that Target is healthy, that the economy is healthy, and that consumers are going to continue spending as long as that remains the case.
The best reason to be cautious on Target is fear of the competition. It’s being squeezed in discount retailing by Walmart, and it is being squeezed online by Amazon.Com Inc. (NASDAQ:AMZN).
But CEO Brian Cornell, who joined the company in 2014 from PepsiCo Inc. (NYSE:PEP) after a credit card breach cost then-CEO Gregg Steinhafel his job, has created differentiation for the company, which is as much a fixture in Minneapolis as Qualcomm Inc. (NASDAQ:QCOM) is in San Diego.
Smaller urban locations mean young consumers flocking to cities can get good prices without long drives. Unique brands like Cat & Jack mean Target is no longer seen as “just” a discounter. The store remodeling keeps it a step ahead of Walmart, which had previously cleaned its aisles with a pay raise.
If you like retail stocks, in other words, there’s nothing not to like about Target today.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
