This article was originally published on May 19. 2022.
Earnings reports tell you a lot about a company when you follow them quarter after quarter. Does the company deliver on its promises? Can it address problems? Are its CEO's comments accurate and does he or she own up to mistakes or explain when things go wrong.
Taken on an isolated basis, however, earnings reports don't paint a full picture. That can lead to the market -- a sort of amorphous collective whole that describes analysts, pundits, traders, and people who like being on TV -- to take certain numbers and use them to push a stock's shares up or down.
Financial media like to tell you if a company beat analyst estimates on revenue and profits, but they're not that good at letting you know the why. That's what happened to Target (TGT) - Get Target Corporation Report when it reported first-quarter earnings. Analysts and more broadly "Wall Street" decided the numbers were bad without really looking at the long term or the company's actual health.
It's sort of like hearing someone sneeze, assuming they have covid, and not noticing that something tickled their nose. Target reported slower same-store sales growth and saw its earnings per share drop by almost 50%.
The market or Wall Street, whatever you want to call it, saw those as bad numbers, and the shares closed on May 18 down over 25%. In reality, Target showed how strong a business it has and why you should consider owning shares.
How Did Target Actually Do In Q1?
When a potential NFL player runs a 40-yard dash, the people evaluating the performance note the wind conditions. Running into the wind slows you down and running with the wind at your back makes you faster.
Target just completed a quarter running into a really stiff wind. It's a time of unprecedented supply chain problems, near-historical high gas prices, very high, if not record, inflation, and the lingering impact of the pandemic. The company also had to deal with a year-ago quarter where covid put the wind at its back, pushing it to 22.9% same-store sales growth.
Despite all of these negative conditions, Target delivered a 3.3% increase in comparable-store sales and an EPS of $2.16 (down from $4.17 in Q1 2021). Basically, the company managed to grow its sales and still make money despite market conditions that drove its costs higher.
Labor costs increased and shipping costs increased, but rising consumer prices on housing, gas, and other items limited how much of the cost increase Target could pass on to its customers.
Target CEO Offers Context
"Our first-quarter results mark 's 20th-consecutive quarter of sales growth, with comp sales growing more than 3 percent on top of a 23 percent increase one year ago," said CEO Brian Cornell.
"...Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time. Despite these near-term challenges, our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single-digit revenue growth, and an operating margin rate of 8% or higher over time."
Target's numbers showed its strength and its ability to weather unprecedented market conditions. The people who drove its share price down opted to focus on a clearly explainable short-term downturn in profitability.
Long-term investors don't think that way. Instead, they ask the question "do these results show me that this company is positioned to be a retail winner for years to come?"
The answer to that is emphatically yes. You don't trade Steph Curry when he misses a shot in the first quarter. Cornell isn't managing to win the quarter. He's running Target to win for decades and he's positioned his company to do exactly that.
On Real Money, Stephen "Sarge" Guilfoyle offered his own take on trading Target.
Bruce Kamich looked at Target's stock charts to see where things are headed now.
And Bret Kenwell identified key support levels to watch for Target.