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. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  5. Stock Analysis

    JCPenney's Path To Profitability (JCP)

    Learn about what J.C. Penney's management team has been doing to profitably grow its business as the company recovers from years of revenue declines.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Trading Center