I am hunting for a victory in Target's ( TGT) quarterly earnings report.
Let's see, is there a victory in improved profitability? A victory in simply putting an end to the string of embarrassing quarters that displayed Target's inability to effectively manage inventory levels in the aftermath of the pandemic? A victory in the fact that the quarter can not be seen as some kind of unmitigated disaster as had become the recent norm?
For the firm's fiscal fourth-quarter, which ended Jan. 29, Target posted unadjusted earnings per share of $1.89, decisively beating expectations for about $1.40 on revenue of $31.395 billion. The revenue print also beat Wall Street's expectations and was good enough for year-over-year growth of 1.3%. Perhaps most interesting was the 0.7% growth in comparable sales, which is not exactly competitive with Walmart ( WMT) as the industry leaders was able to grow comp sales 8.3% for the same period, but it did beat consensus view, which was for an outright contraction.
The Nitty Gritty
The cost of sales increased 5.2% to $23.946 billion, while administrative expenses increased 2.5% to $5.675 billion. This left operating income at $1.159 billion, which amounted to a year-over-year contraction of 44.7%. (Not a misprint.) After accounting for taxes and net interest expense, Target ended up with net income of $876 million (-43.3%).
Inventories ended the period with total inventory valuation of $13.499 billion, down just 2.9% from where that number printed 12 months ago. But in CEO Brian Cornell's defense, he did explain on Tuesday morning that inventories in discretionary categories had contracted approximately 13%, which was largely offset due to higher inventories in high-frequency categories. Guess, I'm going to have to pretend that I'm from Missouri on this one.
A Warning at the Register
For the current quarter, Target expects comps sales to land in a wide range, from a low-single digit decline to a low single-digit increase. TGT sees an operating income margin rate of 4% to 5%. Unadjusted and adjusted EPS are both seen in a range spanning from $1.50 to $1.90. Wall Street had been looking for something closer to $2.15, so this is a fairly drastic miss on guidance.
For the full year, Target sees comp sales similarly in a range from a low-single digit decline to a low-single digit increase. Operating income is expected to grow more than $1 billion as EPS is projected to pint in between $7.75 and $8.75. Again, here, Wall Street was around $9.25, so ... another huge miss on guidance.
Over the next three years Target expects its operating margin rate will reach and begin to move beyond its pre-pandemic rate of 6%. It believes that it could reach this goal as early as fiscal 2024. Once, again I'm going to have to pretend like I'm from Missouri.
Fundamentally ... Not Great
For the full year, Target posted operating cash flow of $4.018 billion (-53.4%), while spending $5.528 billion (+56%) on the purchase of property and equipment. This left Target with free cash flow for the year at a $1.51 billion loss, down from $5.804 billion for the year prior. At least, Target had enough brains not to repurchase any shares during the fourth quarter, and still leaves a rough $9.7 billion worth of capacity in its current authorization.
Turning to the balance sheet, Target ended the quarter with a cash position of $2.229 billion (-62.3% y/y) and an inventory position of $13.499 billion. This puts current assets at $17.84 billion (-17.3%). Current liabilities add up to $19.5 billion (-10.3%), bringing the firm's current ratio to 0.92, which is down from 0.99 over 12 months. Obviously, this is sub-optimal. Because inventories have been such a huge issue for this retailer and for this industry and because those valuations are difficult to bank on, TGT's quick ratio comes to a paltry 0.22, which is down from what was already a fairly awful 0.35 a year back.
Total assets amount to $53.335 billion. TGT did not claim any intangible asset value, which is commendable, but I am sure there is some decent value in the brand name alone. Total liabilities less equity comes to $42.103 billion. This includes long-term debt of $16.009 billion (+18.2%). We're not going to sugarcoat this. Cash on hand is dwindling. The debt-load is growing. The current situation is in a state of consistent deterioration. This balance sheet does not get a passing grade from this author.
My Thoughts
It would have been tough for me to consider investing in Target, given not only the less-than-stellar looking balance sheet and the negative free cash flow for 2022, but how about that double-miss on guidance? Clearly, Target is having a more difficult time traversing the present environment than is its competition. I wouldn't buy this stock with your money. Even if I didn't like you.
At first glance, the reader may see a four-month cup-with-handle pattern bearing a $181 pivot. The stock is trading above all three of its key moving averages. This would be positive, despite a salty-looking daily MACD.
That is positive until one pushes the chart back to last spring and realizes that the stock has been basing between $140 and $181 since collapsing last May. That unfilled gap is the most attractive thing I see on this chart. The $181 pivot stands, but realize just how much resistance is likely built up there after three successive failures in the same spot.
My thinking is that TGT has at least as much a chance at testing its 50-day simple moving average ($161) as it does $181 resistance.
TGT Trade Idea
(This is for minimal lots.)
- Purchase the April 21 TGT $170 puts for about $6.60.
- Sell the April 21 TGT $160 puts for about $3.10.
- Sell the April 21 TGT $180 calls for about $3.25.
- Purchase the April 21 TGT $190 calls for about $1.15.
Net Debit: $1.40
Note: Trader needs TGT to see trade below $168.60 by expiration to show a profit. Trader has sold equity risk at $180 in order to reduce this debit and purchase protection up at $190 in order to prevent potential disaster.
