When Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Costco (Nasdaq:COST) all see relatively uninspiring same-store sales growth trends, I think it's safe to say the U.S. retail market is not in the best of health. Although Target continues to take steps that should improve the company's long-term competitiveness and growth profile, Wall Street is generally very much focused on the now and underperformance creates some challenges for the shares.
Fiscal Second Quarter Results Come In A Little Mixed
Target reported 4% sales growth in the fiscal second quarter, a result that was just a bit shy of Street expectations. Same-store growth of 1.2% was below the average expectation of 1.8%, and traffic was down more than 1%. 

SEE: Analyzing Retail Stocks
Although Target did see a little bit of gross margin improvement, the number was still about 30bp shy of expectations. On a more positive note, though, SG&A expense control was a bit better than expected and the 10% decline in operating income led to an adjusted continuing operating result that was basically in line with expectations.
Oh Canada...
Even Wall Street usually understands that it takes money to make money, and analysts and investors were expecting some dilution from Target's foray into Canada. Based on these early results, though, it looks like “some” dilution is turning into quite a bit.
The effective operating margin for the Canadian operations was a negative 62% this quarter, and they diluted EPS to the tune of $0.21 per share this quarter. It also doesn't help matters that sales appear to have come in well below expectations, as the $275 million in sales were below the midpoint (in the neighborhood of $325 million) of the range of published estimates I've seen. With all of this, Target management has nearly doubled the expected dilution from Canada for FY 2013.
I think it's also worth noting that the Canadian retail environment is getting more competitive as well. Wal-Mart has stepped up its store growth in Canada, and other rivals like Costco, Sobeys, and Loblaw have looked to grow their businesses and compete more aggressively on price against this new entrant.
Tougher Today, But Building In Some Cogent Ways
I don't have many reassuring things to say about the state of the U.S. shopper, nor the back-to-school shopping season. It's pretty clear that shoppers are feeling a pinch, particularly on the lower end of the income spectrum.
I also wonder, though, if shoppers are reallocating their spending. I can't help but notice that comps have been pretty good (if not great) at stores like Home Depot (NYSE:HD), Pier 1 (NYSE:PIR), Williams Sonoma (NYSE:WSM), and Lowe's (NYSE:LOW), so I think there may be something to the idea that consumers have different priorities for their spending these days.
On the other hand, I do like some of the moves that Target has been making. The acquisitions of Cooking.com, CHEFS Catalog, and Dermstore should help improve the company's online offerings (where Target has lagged Wal-Mart and certainly lagged Amazon (Nasdaq:AMZN) and also augment the company's merchandise assortment and margin potential. I'm a little less sold on the Beauty Concierge program and whether this can grab business from retails like Ulta (Nasdaq:ULTA), but it's at least a concept worth exploring.
The Bottom Line
At least some sell-side analysts have been boldly arguing that Target needs to make a bigger plunge in international retailing. Given the difficulties in Canada and the challenges of other retailers in emerging markets (Wal-Mart in Mexico and Brazil, Tesco in China), I hope they reconsider that position. It's not so much that I believe Target can't profitably grow overseas, but the company needs to show it can crawl before it starts trying to sprint.
I'm pretty ambivalent about these shares right now. It would seem that retailers more oriented to durable house-related merchandise is the place to be today, and Target's shares don't seem cheap enough to make a value call yet.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!