Shares of Target (TGT) were selling off in Wednesday's trading session amidst a broad-based risk-off sentiment following Bernanke's comments.
The general merchandise retailer reported soft first-quarter results as the company suffered from poor weather and the increase in payroll taxes. Despite the weak first-quarter results, investors should not panic as the company remains on track with its long-term growth trajectory.
First Quarter Results
Target generated first-quarter revenues of $16.71 billion, down 1.0% on the year, as the company divested its credit card business, which made up 2% of total sales last year. Revenues missed consensus estimates of $16.78 billion.
Net earnings fell 28.5% to $498 million, with diluted earnings falling 26% to $0.77 per share. Earnings came in short of consensus estimates of $0.84 per share.
Adjusted earnings per share, fell by 5% to $1.05 per share, coming in below Target's own guidance of $1.10-$1.20. Last month, Target already warned that poor sales of weather-sensitive goods would result in earnings coming in just below the previously guided earnings range.
CEO and Chairman Gregg Steinhafel commented on the first quarter developments, "Target's first quarter earnings were below expectations as a result of softer-than-expected sales, particularly in apparel and other seasonable and weather-sensitive categories. While we are disappointing in or first quarter performance, we remain confident in our strategy, and we continue to invest in initiatives, including Canada, our digital channels and CityTarget, that will drive Target's long-term growth."
A Look Into The Results
Sales in the U.S. rose by 0.5% to $16.6 billion, as comparable sales fell by 0.6%. Operating income fell by 7.5% to $1.24 billion in the meantime.
Gross margins increased by 50 basis points to 30.7%. Some 20 basis points of the improvement in margins can be explained by changed vendor agreements. The company's growth strategies explain the remainder of the margin expansion.
Selling, general and administrative expenses came in at 20.3% of total revenues, up 130 basis points on the year. The profit-sharing agreement with TD Bank for credit card income, increased technology investments and the changed vendor agreements are to blame. The increase in these costs largely explains the 80 basis points drop in EBITDA margins, coming in at 10.4% of revenues.
The Canadian operations generated $86 million in first-quarter sales, with 24 store openings by March of this year. Solid gross margins of 38.4% were overwhelmed by start-up expenses, as the unit reported an operating loss of $205 million for the quarter, or $0.24 per share on a GAAP basis.
Other one-time factors impacted earnings as well. Target lost $0.41 per share as a result of an early retirement of debt, while it reported a $0.36 per share gain as a result of the sale of credit cards receivables.
Looking Into The Remainder Of The Year
For its current second quarter, Target anticipates to report adjusted earnings of $1.09-$1.19 per share, with GAAP earnings coming in 19 cents lower. GAAP earnings are mainly lower due to the impact of the loss-making Canadian operations. Guided adjusted earnings beat the consensus estimates of $1.06 per share.
Full-year adjusted earnings are expected to come in between $4.70 and $4.90 per share, a 15 cent reduction from Target's previous guidance. GAAP earnings are expected to come in between $4.12 and $4.32 per share.
Target ended its first quarter with $1.82 billion in cash and equivalents. The company operates with $14.2 billion in short- and long-term debt, for a net debt position of $12.4 billion.
Target generated annual revenues of $73.3 billion for 2012, up 4.9% on the year before. Net income rose by merely 1% to $2.96 billion as the company prepared for the launch in Canada.
Factoring in a 4% fall in Wednesday's trading session, the market values Target at $44.0 billion. This values the company at merely 0.6 times annual revenues and 15 times last year's earnings.
Target currently pays a quarterly dividend of $0.36 per share, for an annual dividend yield of 2.1%.
Some Historical Perspective
Long-term holders in Target have seen decent returns. Over the past decade, shares have doubled from levels around $35 in 2003, to peak at $70 in 2007, before the financial crisis put retail spending under pressure. Shares fell all the way to $25 at the start of 2009, but have gradually recovered to levels around $71 on Tuesday, printing fresh all-time highs.
Between 2009 and 2012, Target has grown its revenues by a cumulative 12% to $73.3 billion over the past year. Net earnings rose by 19% to $2.96 billion in the meantime. As Target retired some 12% of its shares over the time period, earnings per share grew by 35% to $4.46 per share.
Just like other major U.S. retailers, Target has been suffering from the increase in payroll taxes, which have cut the after-tax paycheck of U.S. workers and shoppers. The cold spring season has not been helpful either and has impacted the entire retail sector. Earlier Wal-Mart (WMT) and Lowe's (LOW) reported a decline in comparable-store sales, mainly attributed to the poor weather conditions.
Despite the fact that Target already gave the market a heads up on the softer results, investors are not pleased. The revised earnings guidance of $4.70-$4.90 per share implies that Target has lowered its full-year guidance by 15 cents, putting it in line with consensus estimates of $4.83 per share.
Valued around 15 times non-GAAP earnings the valuation seems fair. Note that the expansion in Canada, could boost the growth appeal of the company. The company ended its first quarter with just 24 stores, on track to end the year with another 100 stores in the country. Still, growth is needed to boost the valuation. While cold weather is an incidental, the underlying growth trends remain soft amidst the fiscal consolidation.
Yet Target sticks to its long-term targets. It aims to generate a $100 billion in revenues for 2017, on which it expects to earn $8 per share. Expanding operations should be driven by same-store sale growth, the expansion of its CityTarget store concept and growth in Canada.
Given the nice growth path, investors have some visibility for future earnings, and should not be overly concerned by a weaker first quarter. The continued debt reduction allows for future expansion and shareholder payouts, leaving the company on its long-term growth trajectory path.