Target (TGT) and Abercrombie & Fitch (ANF) reported earnings Wednesday that fell into the "could have been worse" category. That was enough to send both stocks rallying in the high-single digits on a percentage basis. While both retailers issued guidance that was in the ballpark of the Street's expectations, should we believe the guidance? History has told us no. Let's cut through the numbers.
Target's ability to guide earnings on the mark in 2013 was less than stellar. The worst offence was projecting the dilution from the venture into Canada. The dilution from going across the border was 3x original expectations. That is credibility issue No. 1. And in terms of the U.S. business, while we can't blame Target for the environment or the snow, we can blame the company for several quarters of setting the bar too high. Throw in a credit card hacking scandal that was brought to light at a snail's pace and I am not really sure why I should have confidence in the 2014 EPS range of $3.86-$4.15.
I should also mention that range is back half weighted -- who doesn't love a put off the earnings until the second half of the year story? I should also mention Target admittedly cannot tell us what the impact of the credit card hacking will yield in 2014. Last, while margins of -40 basis points could have been worse, have you seen the year-over-year inventory growth up double digits? That may spell gross margin pressure in the current quarter.
Let's move on to the house of hoodies -- Abercrombie & Fitch. Similar to Target, Abercrombie slashed earnings expectations then "beat" the low bar. Yes, Abercrombie & Fitch has pulled this trick out before and hey, it works ? in the short term, that it is. I am not ready to give a round of applause for beating the bottom line yet missing sales. Cost-cutting stories usually work short term but history tells us sales rule at the end of the day. U.S. comps deteriorated through the quarter (U.S. holiday comps decreased 4% yet the quarter ended -8%). The glimmer of good news was that the international segment improved -- but, as a gal who spends way too much time in Europe, I can attest that never-seen before promotions at certain flagship stores appeared before holiday to get things moving. Yet the company is looking for flat-to-slightly-down gross margins for 2014. Really?I do have to give credit to where credit is due to Abercrombie & Fitch. Suddenly, the company has become warm and fuzzy on corporate governance. The CEO/Chairman role has been separated after outrage that Michael Jeffries will continue to rule to the roost. Independent board members have appeared and a poison pill has been killed. On the operational side, the company is continuing to evaluate real estate and acknowledges it has to differentiate between brands. Collaborations are in the works and the company is embracing the fact that fast fashion is not going anywhere. Best of luck to both companies in meeting/beating current guidance. However, I wouldn't rule out a deja vu of 2013.
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