Target's Results Raise Questions

Target (TGT) reported earnings Tuesday and they seemed to leave more questions than answers.

Target Tuesday reported net earnings of $1,028 million for Q4 ended February 2, 2008, a thirteen-week period, compared with $1,119 million in the fourth quarter ended February 3, 2007, a fourteen-week period. Earnings per share in the fourth quarter decreased 4.7 percent to $1.23 from $1.29 in the same period a year ago. This despite the fact that the company repurchased approximately 26.5 million shares of its common stock at an average price of $54.64, for a total investment of $1.45 billion in the quarter.

Monday I posted that Target's unreasonable return policy was a main reason for people refraining from buying clothing and other items that are prone to be returned or exchanged. The flood of emails I received led me here and illustrate that this is becoming a large issue for Target. When the consumer feels pinched, they will watch every penny and take far fewer chances with their dollars. Buying items from Target with this policy now entails more risk than folks want to take.

Any correlation to results? While we heard Wal-Mart (WMT) being optimistic about clothing, Target has seen a dramatic drop in sales. Once the company's strength, it has become a drag. It isn't just the clothing sales loss that hurts. If people are not going there for clothing, they are also not buying all the ancillary items there either during the trip.

I listened to and then read the conference call and one thing stuck out. While management said it was "pleased" with women's results in apparel and "disappointed" in men's, it was hard to quantify. We know earnings fell despite the huge repurchase so are they "pleased" against lowered expectations? It seemed like they wanted to put the blame on toys (an easy scape goat with the lead issues) but it just does not add up.

They also said they expect 7% EPS growth in the current FY. That will essentially be done through additional repurchases. I expect those to be significant in this spring, perhaps $5 billion for the year.


Disclosure: Long WMT.

Comments

[deaverb:]

Returns are very expensive for retailers because it forces suppliers to raise their prices. Once a product is returned it really can not be resold. Taking a tougher line on this is a wise strategic move--as a Target Vendor it makes me far more willing to cut our price to them to the penny, so they can do the same for their customers. Let's not fall off the other side of the horse here, either (which this article scrupulously DOES NOT do; a very fair reporting). Target always takes care of legitimate problems, and from our experience, takes things back 3 or 4 years later sometimes. We have never heard from a Target consumer who felt Target was anything but scrupulously fair. We sell hard goods, software and audiobooks though. It is in apparel that some people wear or use things a few times--then try to return them for credit to buy newer things. This is the rub. With computers now, some retailers are keeping track of who is doing it--and it turns out to be very few--doing most of it.

2008 Mar 02 09:14 AM

[Hugh:]

Americans are spoiled to the hilt.

Labor is a product. Imagine a boss who demanded a refund from an employee for their wages paid because the employee was lazy and did a poor job, or imagine what this lazy worker would say if the employer demanded a re-do at no charge.

I bet that billions are lost yearly to business because of exchanges and refunds. Millions of people believe that they can buy a product, abuse it and then return it with no cost.

Could be that Target is attempting to break this cycle. Good for them.

2008 Mar 02 09:49 AM

[Target101:]

Target's policy is not new. It has been around 5+ years. Get it right.

2008 Mar 02 12:28 PM

[consumer#1:]

Their policy is pretty liberal. You have 90 days to return a product with a receipt. Most retailers are only at 30 days. If you do not have a receipt it is significantly more restricted. But should it not be. That is why you are given a receipt. They also will look up a receipt if purchased with a credit card or check, once again upto 90 days. So please clarify how this is an unreasonable return policy. At some point consumers should accept some responsibility, if you can not manage to handle a receipt, it sounds like an irresponsible consumer.

2008 Mar 03 12:00 PM

[Smarter:]

French owned, doesnt permit non-profit aid, and doesn't have a fair return policy. Why shop where your not welcome.

2008 Mar 03 03:59 PM

[User 159968:]

Smarter (don't think you chose your pseudonym wisely),

You only need to do a little research to see that Target has NEVER been "French owned", donates over 3 million a week to education, as well as to other "non-profit aid", and 90 days certainly seems reasonable to most. Try a search on Google before you express your incorrect rumors, it will make you look "Smarter"

2008 Mar 04 10:28 AM

[TGT FAN:]

"French owned, doesnt permit non-profit aid, and doesn't have a fair return policy. Why shop where your not welcome." Get your facts correct "Smarter"...Target is an American company, started up in Minneapolis Minnesota. They've maintained a fair and consistent return policy 90 days w/a receipt.

2008 Mar 09 03:58 PM