Earnings reports tell you a lot about a company when you track them quarter after quarter. Has the company delivered on its promises? Can it solve the problem? Whether its CEO’s comments are accurate, and whether he or she admits mistakes or explains when things go wrong.
In isolation, however, the earnings report doesn’t paint the full picture. This could lead the market — an amorphous collective whole that describes analysts, pundits, traders and people who like to be on TV — to take certain numbers and use them to push up or down the price of a stock.
The financial press loves to tell you if a company’s revenue and profits beat analysts’ estimates, but they’re not very good at letting you know why.Here’s what happened to Target (TGT) – Get Target Company Report when it reported first-quarter earnings. Analysts and broader “Wall Street” view the numbers as terrible without really taking into account the long-term or the actual health of the company.
It’s a bit like hearing someone sneeze, assuming they have coronavirus, and not noticing that something is itchy in their nose. Target reported slower same-store sales growth and a nearly 50% drop in earnings per share.
The market or Wall Street, whatever you want to call it, viewed these as bad numbers, with shares down more than 25% at the close on May 18. In fact, Target shows how strong its business is and why you should consider owning stock.
How did Target actually perform in the first quarter?
When a potential NFL player runs a 40-yard dash, performance assessors pay attention to wind conditions. Running against the wind will slow you down, running against the wind will make you run faster.
Target had just finished a quarter and it was windy. This is an era of unprecedented supply chain issues, near-record gas prices, very high (if not record) inflation, and the lingering effects of the pandemic. The company also had to deal with Covid headwinds in a quarter a year ago, boosting its same-store sales by 22.9%.
Despite all these headwinds, Target’s same-store sales rose 3.3% and earnings per share were $2.16 (down from $4.17 in the first quarter of 2021). Basically, the company managed to increase sales and still make money despite market conditions pushing up costs.
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Labor costs have increased, and transportation costs have increased, but rising consumer prices for housing, gas and other items have limited how much of the increased cost Target can pass on to customers.
Target CEO provides context
“Our first-quarter results marked our 20th consecutive quarter of sales growth, with comp sales up more than 3% from a 23% increase a year ago,” said CEO Brian Cornell.
“…Throughout the quarter, we faced unexpectedly high costs driven by a combination of factors that resulted in profitability well below our expectations and well below our long-term operating levels. Despite these near-term challenges, our team remains passionately committed to our guests and meeting their needs, which gives us confidence in our long-term financial algorithm, which expects median revenue growth and, over time, Over time, operating margins will be 8% or higher.”
Target’s data shows its strength and ability to withstand unprecedented market conditions. Those driving its share price down chose to focus on a clearly explainable short-term dip in profitability.
Long-term investors don’t think so. Instead, they asked the question “Do these results suggest that this company is poised to be a retail winner in the next few years?”
The answer is yes. When Stephen Curry misses in the first quarter, you don’t trade him. Cornell didn’t manage to win the quarter. He’s been running Target to win for decades, and he’s positioned his company to do just that.
In terms of real money, Stephen “Sarge” Guilfoyle offers his own take on trading Target.
Bruce Kamich checks Target’s stock chart to see where things are going.
Bret Kenwell identified key support levels to watch for Target.