As my age has advanced, I have felt a tad calmer in many ways. The emphasis is on tad, as friends and family members continue to refer to me by the nickname "Mr. Intensity." I kid you not.
But it's just so difficult to stay calm in the face of countless examples of corporate shenanigans. For any given company, investors tend to not realize management is being less than upfront about the real underlying trends in the business until it's too late. The realization, in other words, tends to occur after a profitable position has turned into loss, or as newly entered position fails to cross the profit line -- meaning a gradual wiping-out of principal.
To help you spot such corporate shenanigans, let's dissect the story of the lovable Target (TGT). The 2011 lowlights from the cheap-chic retailer included bumbled marketing plans, a bumbled website re-launch and earnings power that was below optimal. If you had listened to management on the third-quarter earnings call, all would have appeared to be fine and dandy. But that couldn't have been further from the truth, as I'll demonstrate below.
Stock Price: Mr. Market Speaks Loudly
SPDR S&P Retail ETF (XRT): at an all-time high
Wal-Mart (WMT): hovering around its September 2008 "world-is-ending cycle" high
Target: Basically dead money since September 2008, meaning the stock price has not moved much. That's despite the such hyped corporate actions as aggressive share repurchases; close to 900 stores now in the fresh, consumable-goods-focused layout; the launch of a rewards program; and a re-launched website.
The message here is that the return on Target's investments has been subpar for at least nine quarters, as I glean from data compiled by Thomson Reuters. To put it another way, more competitively priced food as a percentage of sales -- plus the expenses associated with remodels and new initiatives (CityTarget, Target Canada) -- has resulted in subdued earnings power, and the stock has reacted accordingly.
Really, Target Management?
I enjoy picking apart comments on earnings calls that compare a company's performance with that of the domestic or broader economy. Although these comments seem generic to the average eye because of a lack of fancy numbers or fun facts, it's important to spot what could be deemed as excuses for fundamental underperformance.
Comment No. 1: "Like many of you, we've been disappointed by the absence of any meaningful improvement in the economy so far this year, as the most recent U.S. unemployment rate of 9% was unchanged from last January."
What the numbers say:
Three of four months experienced positive adjustments to prior month headline jobs number.
Comment No. 2: "Until the U.S. begins to see robust improvement in jobs and signs of recovery in the housing market, we believe consumer spending will likely continue to be soft and uneven, requiring retailers to carefully manage their expenses while finding innovative ways to drive profitable sales and market share."
What the numbers say:
Consumer spending did improve in 2011, and rather strongly, at that. Yet, Target failed to participate fully in the recovery, as evidenced in its uneven trends in monthly comps.
Finally, the Year-End Red Flag: Target dropped its fourth-quarter earnings guidance to $1.35 to $1.43 per share. That's down from the December estimate of between $1.43 and $1.53.
Obviously I am not too keen on giving it a go on Target pre-earnings this week. As I read it, there continues to be a disconnect between analysts' 2012 earnings expectations and the numbers spinning from the asset base.
It is highly probable that Target will guide below consensus for 2012. First, it's entering its third year of its full foray into becoming a cheap chic grocer and beauty care supplier, a process that is a negative for gross margin. Second, it's being forced to compete more on price with a reenergized Wal-Mart -- something I am seeing in the transaction count for Target, as this number is softer than the transaction amount, which embeds inflation. In addition, Target is incurring front-loaded expenses for CityTarget rollouts in 2012 and Target Canada in 2013.
