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Target Earnings Recap

Posted on: August 19, 2008 - Email Article - Printable Version

Santosh Sankar

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Target Corporation [TGT: 33.03, -2.30 (-6.51%)] reported quarterly earnings with a 8% drop in quarterly income hurt by changing consumer spending patterns. Management claims that the current economic conditions are the hardest it has experienced as customers shy from “trendy” items and even reported volatile back to school sales that could harm Q3 earnings. EPS came in at $0.82 with income of $634 million, a considerable drop from a year ago with revenues of $686 million. EPS did grow from $0.80 a year ago when the economy was beginning to deteriorate. I want to note here that we can see the consumer slowdown as the 2nd largest retail chain hurts from a pullback in spending.

Up until recently, the general population was issued credit and used it to purchase whatever they desired. We are in shock right now as credit is pulled and harder to get. Retail entities such as Target are hurt and will suffer more in my opinion as more jobs are lost and inflation remains rampant. Although revenues grew, Target experienced a decline in same store sales, further supporting the idea of a consumer slowdown. The credit card segment saw a 64% decline in profits from a year ago as Target scales back its stake in the card portfolio and JPMorgan [JPM: 34.47, -2.72 (-7.31%)] increases its interests. Management also noted some write downs for the current period, but did not provide a number. I do not think this should be a huge concern at this point as long as Target works to minimize its exposure to poor credit conditions.

I think if you are in retail or want to be, it is wise to look at Wal-Mart [WMT: 52.71, -2.22 (-4.04%)], a larger chain that beat expectations when it reported a few weeks ago. It is a positive that Target is scaling back its credit exposure, but the chain will be hurt as the consumer pinches and runs to Wal-Mart for lower priced goods. I would not expect consumers to spend until credit is easier to attain and the unemployment rate falls- probably early Q2 2009.

- Santosh Sankar

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