The Daily Dose: What Target Actually Said

 | Aug 21, 2014 | 10:00 AM EDT
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Nine straight quarters of customer traffic declines. People buying fewer items each time they come to the store.

Welcome to Target (TGT), which has basically told us that all is not well with the U.S. consumer. Sure, the company's back-to-school sales have started off well. But when in the core of the business -- for instance, home and apparel -- folks are not shopping as much as Target expects and needs. These trends bother me, as they imply that back-to-school strength was merely a blip in the pan, and that August and September will show weak results.

Target and Wal-Mart (WMT) are the pulse of American household, and I am definitely not keen on the fact that both have issued serious earnings warnings to a stock market that loves to go up.

Oddly enough, though, the magnitude of Target's epic full-year warning was highly anticipated by the market following the company's harsh outlook adjustment on Aug. 5. Also, yes, Target has joined Wal-Mart as a major discounter, issuing a material earnings warning amid the back-to-school season and before the start of the holiday season.

So why were Target shares not pummeled Wednesday? Thank good ol' market psychology. In this case, it was the following:

• The company mentioned a 1% comparable-store-sales climb for July. That, in turn, piqued interest that Target's domestic turnaround efforts -- rooted in more promotions -- have started to bring traffic back to the store.

• The results, from domestic comps to fiscal second-quarter adjusted earnings-per-share guidance, came in line with the company's Aug. 5 guidance.

• For Target Canada, investors now have budding hope that the second quarter represents the kitchen sink as new leadership implements structural improvements, particularly in the supply chain and marketing messaging.

• Brian Cornell impressed with his first commentary as CEO. I am warming up to him, myself, also given what I know about him as a person.

All that said, however, buyer beware. Target has given investors minimal reason for encouragement that a global turnaround is secretly emerging at the company. At the level of domestic stores, merchandising issues persist, and these include weak assortments in apparel (most notably in the hot category of athletic apparel) and the over-buying of seasonal categories in light of persistent negative traffic.

In Canada, my contacts continue to share accounts that Target's merchandising has not been up to snuff -- or, in other words, it has failed to support management's more optimistic tone over the past month.  But, to the company's credit, a "comprehensive" review plan is being implemented for the Canada segment.

So, on the more cautious end of things, here are a few facts to highlight.

• July comps of 1%-plus hints that the core of the business remains soft. Remember, the last week of July has been strong for retailers due to back-to-school buying.

• The company is giving away profit margin, yet it is driving neither traffic increases nor units-per-transaction gains.

• To date, the Canada operations have incurred $2.1 billion in operating losses. In order for investors to become more encouraged on Target's fundamental outlook, the Canada division has to start showing that it could be a profitable opportunity -- and fixing the supply chain won't guarantee that. The division has to emotionally connect with consumers who are currently in love with Costco (COST) and Wal-Mart. We also need a plan of attack from Cornell for the division, although that is unlikely until the fourth-quarter report early next year.

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