Traders Should Be Wary of Target Despite Earnings Improvement
Advanced stock traders can consider this move as the retailer faces a bullish pattern.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
On Tuesday morning, huge American retailer Target TGT, which has made a habit of playing fourth fiddle to the likes of Walmart WMT, Amazon AMZN and Costco COST, released its fiscal fourth quarter financial results. The numbers weren't really bad despite a year-over-year contraction in sales, and the guidance was in line with expectations. The stock is down small early, but so is the broader marketplace.
Target has been wildly volatile in recent quarters on days when the firm reports earnings, so down "just" a couple of percentage points can't be seen as disastrous. On November 20, 2024, shares of Target sold off almost 22% in response to the firm's third quarter earnings. Prior to that:
- The day of Q2 earnings: +10.3%
- The day after Q1 earnings: -8%.
So, a drop of 3%, which I see as of this writing, is rather tame by comparison.
One bright spot despite the drop in overall revenue creation was the 1.5% growth in comp sales and the 8.7% growth in comparable digital sales.
Target Operations
For the three-month period ended February 1, Target generated net sales of $30.915 billion, which did beat (just slightly) expectations, but was still only good enough for year-over-year sales "growth" of -3.1%. The cost of these sales contracted 2.7% to $22.802 billion. Administrative expenses dropped by 0.1%, as depreciation and amortization costs grew 3.9%.
This left the firm with a quarterly GAAP operating income of $1.467 billion, which was down a whopping 21.3% from the year-ago comparison. After accounting for interest, other income/expenses and taxes, GAAP net income dropped 20.2% to $1.103 billion. This works out to $2.41 per fully diluted share. That number easily beat the $2.26 or so that Wall Street was looking for.
Target CEO on Earnings
Target CEO Brian Cornell, whom I have often been critical of in the past, commented in the press release:
"Our team grew traffic and delivered better-than-expected sales and profitability in our biggest quarter of the year. Results were led by strong performance in Beauty, Apparel, Entertainment, Sporting Goods and Toys."
Cornell added, "As we look ahead, our continued investments in digital capabilities, stores and supply chain — combined with a focus on newness, value, speed and reliability — will further differentiate our one-of-a-kind physical and digital shopping experience. Consumers continue to be drawn to the everyday discovery and delight that only Target can deliver, and we're committed to leveraging our strategy, scale and unique position in retail to build on this distinct competitive advantage and drive long-term profitable growth."
Target Stock Fundamentals
For the full year, Target generated operating cash flow of $7.367 billion (-14.5%). Out of that number came capex spending of $2.891 billion (-39.8%), leaving free cash flow of $4.476 billion. Out of that free cash, the firm repurchased $1.007 billion worth of common stock for the corporate treasury while paying out $2.046 billion in cash dividends to shareholders.
Turning to the balance sheet, Target's cash position ended the period at $4.762 billion and inventories of $12.74 billion. That put current assets at $19.454 billion. Current liabilities ended the quarter at $20.799 billion, including short term debt of $1.636 billion.
This puts the firm's current ratio at 0.94, which does not really cut the mustard in our world. It was, however, an improvement from 0.91 of 12 months earlier. The firm's quick ratio would obviously be awful, but we do not hold retailers to the same standards on quick ratios as we do other businesses due to the inventory-centric nature of the business.
Total assets amount to $57.769 billion, which does not include anything intangible. We do appreciate that. Total liabilities less equity comes to $43.103 billion. This does include long-term debt of $14.304 billion, which was down 4.1% from a year ago.
Target Guidance
For the full year ahead, Target is projecting net sales growth of roughly 1% and comp sales growth close to flat from the just ended fiscal year. Wall Street found that disappointing on Tuesday morning.
The firm sees a modestly-improving operating margin and GAAP EPS for the year of $8.80 to $9.80. Wall Street had been looking for about $9.25, so this puts the midpoint of the range at $9.30. That's a beat in my book, though I have heard it described as something else on FinTV this morning.
My Thoughts on Target Stock
I am not going to be as sharp with Target as I have been at times over the past couple of years. I still don't fully understand how Cornell has managed to hang onto his job for how badly, in my opinion, the firm has been managed at times over recent years. That said, it is clear that the firm at this time is being managed more efficiently.
Margins are improving. Free cash flow is improving, despite the fact that total sales and operating cash flow are both in a state of decay. The firm is not looking for a great fiscal year, in terms of sales or comp sales, but does expect to perform well enough in terms of profitability. I am not sure that I want to invest in this name at this time, but I am sure that if I am a shareholder that I want Cornell to keep doing now, what he's been doing.
TGT stock is at a very critical place on the chart. Starting a supporting trendline back in May and drawing a line of resistance that goes back to this past November, it appears that we could be looking at a falling wedge, which is a pattern of bullish reversal.
Am I convinced? No. While there is a gap left over from the last reporting season that would require a tick above $154 to fill, the stock is testing the lower trendline.
That leaves two paths for the shares: Rebound off of that trendline and then there's a ballgame for the bulls. The low from back in November. I don't know about filling the gap, but the 50-day SMA at $133 could be realistic. On the other hand, losing that line of support and the lows of 2023 in the $102 range could come into play.
Do I buy this dip this morning? No. Do I jump on the bandwagon if it looks like the falling wedge pattern setup is playing out? Very possibly.
If I'm a novice investor or someone who cannot keep a close eye on the stock, do I take a powder and watch for now? I think so. Better to initiate down at those 2023 lows or on momentum after the turn than to front-run an expected turn and end up being wrong.
At the time of publication, Guilfoyle was long AMZN equity.
