Another Retail Canary in a Coal Mine?

March 7, 2023

Big box retailer Target released its earnings report last week.

And for the first time in a year, its numbers didn’t suck…

Earnings per share came in at $1.89 vs. $1.40 expected, while reported revenue was $31.4 billion vs. $30.72 billion.

Granted, these were fourth quarter numbers which notably cover the holiday season. But even so, they beat the previous Q4 report by a full percent.

A Glimmer of Hope

Target had been struggling for some time. 

Their story was basically the same as every other retailer at the time. Business boomed early in the pandemic, as people spent on things to make their homes nicer.  But as time went on, savings (and stimulus money) ran out, inflation started soaring, and buying patterns shifted — leaving Target with a massive inventory overhead (that would eventually have to be discounted away). 

Long considered an upscale rival to Walmart, Target can rely on items like household essentials, beauty products and even groceries to shore up sales rather than just offering discretionary-type products — like clothes and TVs.

But finally last May they issued a warning that inflation would finally begin eating into their net revenues. Investors wasted no time dumping shares. The stock collapsed 28% in a single session. 

The stock has basically never recovered from that.

Last week, however, the company reported that inventory numbers were back under control — which should be a positive for the company. 

And the sales and revenue numbers should be encouraging as well. 

So all is well?

Not Quite

While the trailing sales numbers were good, the forward guidance offered some extreme caution (my emphases)…

For first quarter 2023, the Company expects comparable sales in a wide range, from a low-single digit decline to a low-single digit increase and an operating income margin rate of 4 to 5 percent.  First quarter GAAP EPS and adjusted EPS are both expected to range from $1.50 to $1.90.

In other words, earnings are expected to keep falling from Q4 levels. And maybe worse, they used the exact same language talking about the full year

For the full year, the Company expects comparable sales in a wide range from a low-single digit decline to a low-single digit increase.

I’ve been writing a bit about the health of the retail sector. In fact, last May (after the Target earnings debacle) I wrote to my paid subs in some detail on the topic.

The gist was that the retail sector was getting crushed… even in the face of stellar retail sales numbers. That April, initial retail sales were reported up .7% over the previous month.

This past month, the Census Bureau reported retail sales increased .3% in January — during what is typically known as “return month” after the holiday shopping season (which months showed up as negative BTW…)

I think it’s pretty clear you can no longer trust the veracity of most (if not all) economic reports coming out of Washington. 

Right now, a better canary in the economic coal mine would be the earnings of the players in the retail sector.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily