Seeking Alpha
Long/short equity, research analyst
Profile| Send Message|
( followers)  

Stocks went on a roller coaster ride today with the Dow Industrials and S&P 500 reaching all-time highs intraday before falling on fears that the Fed may begin to taper its long-standing Quantitative Easing (QE) program sooner than expected. Federal Reserve Chairman Ben Bernanke noted the following in his testimony before Congress today: "In the next few meetings, we could take a step down in our pace of purchase," Bernanke said in a question-and-answer session with the Joint Economic Committee. There has been "some improvement" in the job market, and the central bankers will focus on whether this continues, "and there is confidence that it is going to be sustained." Initially stocks jumped on Bernanke's prepared remarks, but this was short lived upon his testimony before the Joint Economic Committee.

When grilled about the Fed's exit strategy, nothing was more disturbing than what we learned recently which might suggest that curtailing QE and unwinding the Fed's balance sheet may be trickier than initially expected. The Fed started a review of their exit strategy principles last released to the public in 2011. The officials decided that "the broad principles" were still valid but the central bank was likely to need greater flexibility in the details. No decisions were made and Bernanke asked the staff to do more work on the issue for the policymakers to review in the future. Let's try to put this into more simple terms: "Back in 2011 we thought this particular strategy might work, however, the landscape of the bond market and MBS market has changed and unfortunately the economy has changed very little, so we're going to have to take a mulligan on this one for now".

We can't focus all our attention on the Fed given the overall market conditions which suggest that investors should buy each and every dip. Frankly speaking, it has been working for the last 4 years. But all good things must come to an end as they say. So with that said, let's look at a key retailer which reported earnings today and which may prove to shed some light on what is really important in our consumer driven economy, the consumer of course.

Earlier this morning we had an important retailer announce earnings that, well to put it bluntly; they stunk up the joint! Maybe we should have listened more closely when Wal-Mart (NYSE:WMT) reported earnings a week ago. This retail giant missed EPS and revenue estimates by 0.87 percent and 1.92 percent, respectively. Net sales for Wal-Mart U.S. rose by just 0.3 percent from the year prior, with net operating income rising 5.9 percent. Same-store sales dropped by 1.4 percent during Q1 2013 for Wal-Mart. Same-store sales falling is not where you want to be as a retailer when the Fed is pumping as much liquidity into the system as it can under the circumstances of the economy. So based on Wal-Mart missing expectations, what could we expect from its peer company Target Corp (NYSE:TGT)?

I wrote an article titled "Target Moves Into Canada As Jobs Decline" several weeks back on what investors might bear witness to upon Target's Q1 2013 Earnings release. I tried to focus on the most important aspects of Target's business and what investors are missing behind all of the flashy commercials and licensed brand partnerships. Naturally, I looked at the same-store sales trends which are offered in the following table:

SSS Change

Y-O-Y SSS Change

July 2012

Up 3.1%

-1%

August 2012

Up 4.2%

+.1%

September 2012

Up 2.1%

-3.2%

October 2012

Up 2.4%

-.9%

November 2012

Down 1%

-2.8%

December 2012

No Change

-1.8%

January 2013

Up 3.1%

-1.2%

My overall bearish sentiment in the Target article was supported by the trend in same-store sales as well as gross margins contracting for several quarters. However, much of my bearish sentiment also focused on the consumer and general retail sales data released by the department of commerce on a monthly basis which proved to suggest that retail sales had slowed on a YOY basis.

Most investors already knew what to expect when Target was set to report Q1 earnings today because just a few days after my Target focus article was published, the company issued a press release which saw the company slash FY13 earnings guidance. Unfortunately, investors weren't listening and the stock continued to rally up until earnings were released this morning.

Today the company released earnings that showed a 29 percent drop in net profits. Target said it earned $498 million, or 77 cents a share, last quarter, compared with a profit of $697 million, or $1.04 a share, a year earlier. Excluding one-time items, it earned 82 cents a share, which is below the Street's view of 85 cents. Revenue slipped 1% to $16.71 billion, trailing consensus calls from analysts for $16.78 billion. Same-store sales shrank 0.6%. "Target's first quarter earnings were below expectations as a result of softer-than-expected sales, particularly in apparel and other seasonal and weather-sensitive categories," CEO Gregg Steinhafel said in a statement. "While we are disappointed in our first quarter performance, we remain confident in our strategy."

On another negative note, Target downgraded its 2013 non-GAAP EPS forecast to $4.70 to $4.90, compared with $4.85 to $5.05 previously. However, even the low end of the new view would exceed estimates from analysts for EPS of $4.48. For the ongoing second quarter, Target sees non-GAAP EPS of $1.09 to $1.19, which is above the Street's view of $1.06. Lastly, Target said it repurchased about 8.5 million shares of its common stock during the first quarter at an average cost of $64.04, equaling a total investment of $547 million.

Shares of TGT are off nearly 5% today after reaching a 52 week high earlier this week. It remains to be seen if today's sell-off is just some well-deserved profit taking or if it is the beginning of a larger move to the downside. One thing is for certain, same-store sales continue to weaken for Target in an environment where the Fed is stimulating the economy and the housing market is gaining strength. TGT investors may need to consider what would happen in an economic environment without Fed stimulus and a slower housing market.

Source: QE Doesn't Help Target's Same-Store Sales