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.