Retail Roundup Finds Retail Stocks Rounding Lower On Q1 2016 Results From Target

| About: Target Corporation (TGT)
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Summary

Target's revenue miss and lowered Q2 guidance drag on retail stocks.

Target finds online growth deceleration.

Retail stocks like Macy's seek out new 52-week trading lows.

This morning's "Retail Roundup" finds brick and mortar chains like J.C. Penney (NYSE:JCP) , Bed Bath & Beyond (NASDAQ:BBBY), Kohl's (NYSE:KSS) and Wal-Mart (NYSE:WMT) shares under much pressure. The reasoning behind the pre-market plunge for these retailers comes in sympathy due to the latest quarterly results from Target Corp. (NYSE:TGT). The disaster that has been brick and mortar share price erosion since the beginning of the earnings season has found itself another leg lower today.

Target announced a Q1 2016 earnings beat while missing revenue expectations. The big-box department store chain with over 1,800 store locations in the U.S. reported earnings of $1.29 a share against a $1.20 EPS estimate. This was highly favorable, but revenues came in at $16.2bn, which fell short of estimates by roughly $120mm. As such, shares of Target have succumbed to pressure in the pre-market by almost 8 percent. Shares had already fallen in sympathy as peers like J.C. Penney and Kohl's reported misses on the top line and indicated week consumer trends during the Q1 period versus a year ago. Target echoed the same sentiment in this morning's press release.

We are pleased with our first quarter financial results, which demonstrate the effectiveness of our strategy in an increasingly volatile consumer environment," said Brian Cornell, chairman and CEO of Target. "First quarter comparable sales in Signature Categories grew more than three times the Company average, digital comparable sales grew 23 percent, and strong execution by our team delivered stronger-than-expected growth in Adjusted EPS. With an outstanding team, a resilient business model and a strong balance sheet, we plan to successfully implement our long-term strategy, even in the face of a challenging short-term consumer landscape.

Although the company reported a total quarterly increase in store traffic and digital sales growth of 23% for the quarter, it is likely that traffic growth slowed towards the end of the quarter. Additionally, it should be of concern that digit sales growth for the quarter of 23% is a marked growth deceleration from the same period a year ago and a trending issue for the retailers trend sales online. It was only a year ago that Target outlined its belief the company could show continuous growth in e-commerce of 40% long term, but the company has not hit that mark since disseminating that expectation or forecast.

Another positive note from the Target quarterly results was expanding gross margins, but even this must be put into its most appropriate context, as it may be a one-time benefit. First quarter gross margin rate was 30.9 percent, compared with 30.4 percent in 2015, reflecting the benefit of the sale of the Company's pharmacy and clinic businesses, combined with the benefit of the Company's cost savings initiatives, partially offset by investments in promotions. First quarter SG&A expense rate was 19.4 percent in 2016, compared with 19.9 percent in 2015, reflecting the benefit of the sale of the Company's pharmacy and clinic businesses along with continued expense discipline across the organization.

Most retailers announcing their quarterly results continue to tout cost cutting measures as a way to help boost profitability. While this may stem the near-term tide from other factors impacting profitability, longer-term measures need to address this issue and in accordance with growing top-line results. I'm sure investors will have a great deal more to consider regarding Target's Q1 2016 results and now lowered Q2 2016 guidance on today's Conference Call with management.

Heading into the opening bell this morning, shares of M are looking to achieve another 52-week low, pressured by Target's results and the continuation of disappointing results from the retailer. In recent publications, I've invited readers and investors to better understand and/or appreciate the difficulties in managing the restructuring of Macy's going forward. While Starboard and Green Light Capital have offered a rosy outlook for the company given its strong real estate portfolio, I have offered an opposing view. My view is that the vast majority of investors will value the company based on its ongoing retail operating results and not activities surrounding the company's ability to monetize its real estate assets. Other investors are recognizing shares of M as cheaply valued and ripe for a buyout. In kind with my former opposing view I would offer that M shares are valued cheaply presently due to forecasted troubles that lay ahead for the retailer in what is clearly a difficult consumer and retailing environment.

Shares of JCP are not finding an ability to bounce back from their revenue miss in Q1 2016, even with an upgrade coming from Baird denoting the recent sell-off as being a buying opportunity for investors. In light of retailer disappointing quarterly releases ahead of the J.C. Penney quarterly release, I hedged a significant portion of my JCP position to where my losses equate to roughly $.50 a share presently. For investor consideration on Twitter (NYSE:TWTR), I regularly offer my positioning and intentions for action with my stock ownership.

I've offered to readers and investors a juxtaposition and weighted value of J.C. Penney's operational activities in an article titled "J.C. Penney And Macy's: A Juxtaposition Of Retailing Initiatives". This article offers detailed analysis concerning J.C. Penney and Macy's strategies to grow sales and earnings for the foreseeable future.

With all of this big-box retailers finding their shares devalued in recent weeks, I would encourage investors to consider a hedging strategy that lowers the total risk of capital invested in the retail space. I am presently not of the opinion that most offered strategies to offset the growing issues impeding consumer spending is easily remedied by any retailer. As such, retail stocks such as the ones mentioned within are likely to moderate lower in price value over the next 90-day period. Having said that, if one chooses to increase exposure to these retail stocks, it may prove prudent to do so with consideration of an individual stock's dividend yield.

Disclosure: I am/we are long JCP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.