Boy do I want to love Target's (TGT) shares.
Walk through most Target stores and you can easily see the changes made by CEO Brian Cornell. In the fresh-food section now, for example, there will often be pre-cut packages of veggies alongside steak -- both of which are ideal for a family-friendly fajita night. Head into the beer section and it's almost reminiscent of a local beer distributor. Most of the coolers are jam packed with pricier craft beers (alongside the well-established brands such as Budweiser).
There is now an entire aisle devoted to better-for-you snack bars, which have become the go-to kids' food purchased by busy moms. Many electronics sections have received upgraded signage and fixtures, giving the department a faux-luxurious feel. In short, you just want to buy a $300 pair of Beats by Dre headphones and maybe even chit-chat with the person ringing up your splurge.
Kudos to Cornell for trying to get as much sales and profit from every square inch of a Target store. Heck, there is certainly enough space there to try and squeeze money from. However, despite the obvious upgrades to the shopping environment, I don't like how Target's stock has been acting over the past three months.
The lackluster first-quarter earnings report, which was headlined by weaker-than-planned same-store sales and a soft second-quarter profit outlook, has really hung over the stock like a black cloud. And deservedly so, as we never got a deep explanation (the company blamed weather, a volatile economy) from Target on the factors behind its swift trajectory change in same-store sales and the narrative on the medium-term outlook.
Red flag: Target's shares have lagged the broader market's rally...and Walmart's have move higher.
Source: Yahoo Finance
I think Target is having another so-so quarter, which when delivered later this month, could be met with a fresh round of selling by Wall Street (which remains very bullish on Target).
Along with that potential so-so quarter being handed to investors, it's likely the company trims its current full-year earnings outlook -- the one it oddly held consistent coming out of the first quarter. If Harley-Davidson's comments on the macro outlook were any indication of what's ahead for retail earnings season, many companies will drop guidance in an effort to reset expectations going into back-to-school season and the holidays.
Here are a four things that give me pause on Target:
1. Walmart is winning the narrative on Wall Street: Believe me, I am far from a Walmart (WMT) fan-boy. But even I have to admit to being impressed by the steady stream of positive news from the company in recent months.
Walmart continues to roll out its online food-delivery option. It's slashing prices in key traffic driving areas, which is great amid the sluggish consumer-spending backdrop. And it has taken the fight back to Growth Seeker holding Amazon (AMZN) on several fronts.
I think Walmart is an easier stock to stay long here, especially as we have gotten weak results from the restaurants as consumers seek out value in eating at home.
2. Speaking of restaurants: The middle-income consumers that shop Target are also the ones that frequent the likes of Buffalo Wild Wings (BWLD) , Action Alerts PLUS holding Starbucks (SBUX) and several other restaurants that have reported below-plan sales for the second quarter. In particular, Starbucks operates locations inside of many Target stores. I think the restaurant sector's weak results hint at less-than-stellar results at Target
3. Packaged food company results: Across the board, packaged-food results have been mixed. Bottom lines are coming in OK as a result of continued cost cuts. But top lines have been sluggish due to the cautious consumer.
Hershey HSY voiced disappointing demand for its newest products, citing weak traffic in the center aisles of supermarkets. Campbell Soup (CPB) sounded conservative on its near-term sales outlook during its latest analyst day. Coca-Cola's KO unit volume in the U.S. slowed sequentially. It's tough to warm up to Target in light of this commentary.
4. Amazon's impact: There has to be an odd duck (or two) out in retail during the second quarter due to Amazon's blowout quarter. I think it's Target (and department stores).
Walmart stepped up well in the quarter to showcase its deals (notably for Prime Day) and new delivery services. Target seemed very quiet to me, and I think that will show up in the company's results.