Now what on Target?
That is likely what investors are thinking in the wake of Target's (TGT) stock getting pummeled in response to a disappointing second-quarter outlook and slightly weaker-than-planned sales in the first quarter. I had a feeling it would be a bad day when Target brought CEO Brian Cornell onto the media call with reporters in the morning -- that is definitely not the norm.
Deciding what to do next with Target is not cut and dry, however. Check out the positives:
1. First-quarter sales trounced all retailers not named Home Depot (HD) and Lowe's (LOW). So in one respect, Target showed that its premium relative valuation is justified.
2. The company saw sales increase in apparel and home, which wasn't the case at J.C. Penney (JCP) and Macy's (M). Kohl's (KSS) quarter sucked, too.
3. Online sales rose over 20%. Staples (SPLS) saw a 1% sales increase online ... just saying.
4. Store traffic has increased for six straight quarters, impressive in light of the continued shift to digital shopping that is completely upending bricks-and-mortar retailers.
5. The company has launched its store-of-the-future pilot at 25 stores in California (full coverage of this now on TheStreet's new homepage). I think the enhancements to the restaurants (healthier options on offer) and the way merchandise is presented will be very helpful to sales and profit over time as they are rolled out chainwide. I expect Target to embark on an aggressive store remodeling plan in 2017 after spending this year testing new ideas.
But in the end, I think one has to be cautious on Target given the commentary from execs and the broader narrative right now on retail. Shares could easily shed another 5% over the next month. I think several factors should cause people to jump to the sidelines on Target:
1. No definitive macro reason for the post-Easter sales slowdown. To me, that reads as there is a lot of volatility in sales week to week at the moment -- I prefer some sense of consistency with a stock valued a premium to rivals such as Target.
2. Earnings could come in toward the low end of Target's second-quarter guidance as it promotes aggressively for Memorial Day and at other points in the quarter to try to drive traffic. I am also concerned with how apparel sales will fare as the department store sector tries to work through a ton of unsold spring/summer merchandise.
3. I would have liked it if Target trimmed its full-year earnings guidance instead of saying the range remains "achievable." The sluggish start to the quarter and market reaction gave the company an opportunity to reset investor expectations and possibly continue beating on earnings in the second half even with weaker sales. Comprehend?
Note that this call is not management driven. Cornell is a world-class leader, and he has assembled quite the impressive team around him.
If you want a little bit of action, you might want to circle Best Buy (BBY) for a short. Target highlighted weak sales of electronics during the quarter and Staples said tablet sales remain soft. Moreover, Home Depot and Lowe's had amazing quarters in appliances, which I think came at the expense of Best Buy. Not helping Best Buy's cause in terms of investor sentiment: a disappointing quarter and outlook from Apple (AAPL). (Target and Apple are part of TheStreet's Action Alerts PLUS portfolio.)