Target (NYSE:TGT) has essentially been a pillar of the retail sector for the last few years, reporting incredibly consistent earnings each and every quarter.
However, in its third fiscal quarter report, which was released on November 20, there's little doubt that the company missed the mark. Its earnings were lower than the previous year's quarter, and the company failed to meet the consensus estimate.
In the period ended November 3, Target's earnings came in at $483 million (56 cents per share). That's down from the $506 million (59 cents a share) it earned in the comparable quarter last year. This number is also well below the 62 cents a share that the Street had been looking for. On the bright side, it generated $14.84 billion in sales which was a roughly 9% improvement over the $13.57 billion it posted last year, and just ahead of the roughly $14.83 billion that analysts had been expecting. In addition, its same-store-sales were up a relatively healthy 3.7%.
Management blamed the weak EPS numbers on soft sales in higher-margin categories. However, it did not delve specifically into which items underperformed. It also did not clearly indicate if this same trend has continued thus far into the fourth quarter. In a conference call, Doug Scovanner Target's CFO said that while Q4 profits will come in north of Q3 numbers, its EPS growth will probably be pretty modest compared to last year when it reported a 22% improvement in its bottom line.
Problems Will Continue
I have a sense that the fourth quarter will probably be pretty lousy. There are several clues that point to this:
1) Wal-Mart (NYSE:WMT) is aggressively cutting prices, which means that competitors will probably have to do the same.
2) The company's high-margin merchandise isn't moving (at least it wasn't in Q3).
3) A recent Consumer Reports survey indicates 23% of shoppers plan to spend less money this holiday season compared to last year.
4) The weather, particularly on the East Coast has been cold and dreary lately, and this can hurt retail shopping.
5) The price of fuel continues to rise. This, too, may cause a reluctance among consumers to spend during the holidays.
I think Target will have a trouble meeting the $1.37 a share estimate in Q4. And as a result I think the stock could trade even lower. (To learn more, check out Analyzing Retail Stocks.)
With all of that in mind, I think that the stock could get a boost after the holiday season thanks to the board's recent $10 billion stock buyback authorization. The authorization is quite large, even for a company like Target, as it presently accounts for about 20% of the company's outstanding shares.
I'd probably wait until the fourth quarter plays itself out before jumping in. However, don't wait too long, as I think that 2008 has the potential to be a decent year. Analysts are forecasting that the company will earn $4.01 a share in fiscal 2009, which would represent an almost 13% improvement over the current fiscal 2008 estimate of $3.55 a share.
Bottom Line
Target is coming off a less than stellar quarter, and stiff competition from the likes of Wal-Mart and other retailers leads me to believe that the fourth could be difficult. That said, I think that the company’s willingness to buy back stock, and its position as one of the big leaders within the industry will enable its shares to fare well over the long haul.
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