We've been following Target (NYSE: TGT) for a while now as a company that's beating the odds in brick-and-mortar retailing, augmenting its online experience and making headway in a market where many thought Amazon (NASDAQ: AMZN) would emerge the only winner. Now that Target's fourth-quarter figures have been released, the news isn't all great, but it also demonstrates the impact that change can have.
The Fourth Quarter Wasn't All Sunshine and Rainbows
Any time you're talking about the fourth quarter for a retailer, expectations commonly climb. This is, after all, prime time for retailers. You've got Halloween and Thanksgiving preparations to consider—costumes, candy and turkeys don't just appear on the front doorstep by magic, you know—plus the massive run-up to the biggest holiday of the year, Christmas, along with its cohorts in Hanukkah and Kwanzaa.
That's what made Target's fourth quarter report a little disappointing. While earnings per share (EPS) figures beat expectations slightly, coming in at $1.69 per share instead of the expected $1.65, revenue was slightly under par, coming in at $23.4 billion instead of the expected $23.5 billion. Meanwhile, same-store sales growth held exactly as expected, coming in at the planned 1.5% according to Refinitiv figures.
This was report enough to send shares up over the previous day's close of $109.02, but all those gains were given back as trading continued. As of this writing, however, Target recovered some of its losses to reach $109.77.
Target Proves the Value Change Can Bring
While sales in stores were a mite on the soft side—Target noted weak sales in electronics, housewares and toys—Target also had some positives to show off. Perhaps the biggest of these were the gains seen in the online shopping side of things.
Digital sales were up fully 20% in the fourth quarter. That's somewhat disappointing growth considering the 31% growth seen in the third quarter—and the same number in 2018's fourth quarter figures—but percentage gains often get harder to produce the higher up the numbers go.
Target's same-day options—including pickup in store, drive-up pickup and delivery—gave Target a significant boost, representing better than 80% of that sales growth. The addition of new product lines also helped out, as Target brought in several new apparel brands and a new line of luggage besides.
A look at short-term guidance upcoming suggests that Target's not done yet with its expansion plans, slating a range of earnings for the first quarter between $1.55 and $1.75. This lines up reasonably well with Refinitiv estimates of $1.66, though Refinitiv figures are also looking for $18.19 billion in revenue and a hike in same-store sales by 2.7%.
But Possible Troubles Wait Ahead
There's one major problem with the assessment from Refinitiv: it's addressing the first quarter of the year. The first quarter of the year is often bad for retailers, for a range of reasons. One, there's the always-unpredictable weather to factor in—fewer people are out shopping in the winter months, generally, because they're dodging snow, ice, and other consequences of facing away from the sun for extended periods—but that's just for starters. There's the lack of significant holidays—the closest winter has is Valentine's Day—to help drive sales, and at least some of the sales are front-loaded onto the previous quarter thanks to gift card sales.
Worse, there's a whole new destabilizing element in retail: the coronavirus. Not only will the coronavirus make it harder to get customers interested in coming into a store full of other people who may or may not be sick, but also, stores will have a harder time getting merchandise to sell since the factories that make it are located in an area hit hard by the disease: China. Moreover, how many of its customers will face their own coronavirus-related economic problems as supply line issues begin to crop up all up and down the retail food chain?
Still, Target has proven a lot more resilient than some expected, and may already have plans in place to address these issues. The drive-in pickup options should be especially helpful thanks to reduced contact, and with these and other points in play, Target is demonstrating that rolling with the punches, especially for retail operations, is a quite effective strategy.
7 Stocks That Will Help You Forget About the Fed
Normally when the Federal Reserve (i.e. the Fed) makes an announcement, the market reacts predictably. That’s due, in large part, to the nature of what the Fed normally announces. Will interest rates go up, down, or remain unchanged? And for their part, the markets have a pretty good idea what the Fed will do before they do it.
But the Fed’s announcement of August 26 was a little different. They talked briefly about interest rates (they’re staying really low for a long time). But they were more concerned about inflation. Well, the Fed is always concerned about inflation, but this time they really mean it. Basic economics says that low-interest rates should spur inflation.
However, the market has been defying conventional wisdom and the Fed is not getting the inflation they want. So the Fed has basically said that they’re letting inflation go rogue. If it goes above their target 2% rate, so be it. The Fed is done trying to hit a target.
At first, the markets cheered the news. Not only was the Fed not taking away the punch bowl, but they were also going to keep the low rate liquidity going for a long time!
But after a little while to digest things, investors are realizing they have to be grown-ups about this. And now investors are considering how to rebalance their portfolios for the remainder of 2020.
I don’t know about them, but if I were you I would target companies that have a high free cash flow (FCF). Whether it’s your personal finances or in evaluating a stock, cash flow is your friend.
When a corporation has high FCF, they have more strong growth in good markets and more flexibility during when the economy is weaker.
As institutional investors come back into the market, it’s time for you to reposition your portfolio for whatever comes next.
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