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What Can Target’s Earnings Reveal About the Consumer?

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November 17, 2015
Find out what Target’s earnings say about consumers.

What’s really going on with the consumer? Q3 earnings results from a wide berth of consumer-related industries have been as dappled as a calico cat. That includes strong results for big-ticket autos, home improvement, and electronics but softer sales for the everyday essentials like apparel and cosmetics. It’s this latter short-list that has largely accounted for a lagging retailer reporting season. Can Target (TGT), whose shares have been sliding, buck the sector trend?

Wall Street analysts note retailers’ warnings about substantial inventory levels going into the most important shopping season of the year. “That has the potential to translate into big markdowns during the holiday season and lower margins for Q4 earnings,” says Jharonne Martis, director of consumer research at Thomson Reuters. Of the near 75% of retailers that have already turned in earnings, 61% reported revenue below analysts’ expectations, according to Thomson Reuters. And negative guidance is trumping positive guidance by nearly 2-to-1. That puts added emphasis on clues from Target management about upcoming months. TGT issues earnings ahead of Wednesday’s market open.

Better Quarter Expected

As the nation’s two largest discount retailers, Wal-Mart Stores (WMT) and Target could give us an indication of consumer spending in general, but not necessarily a cohesive one. WMT turned in results today that MarketWatch and other financial media covering the report said reflected slower spending on groceries and a foreign currency hit, as WMT continues to tussle with higher labor costs, operating and reinvestment costs, and tougher online competition that it’s trying to emulate with a big investment in e-commerce. WMT reported earlier today that Q3 profits tumbled to $1.03 a share from $1.15 a share a year ago. But the Street seemed to care more that on an adjusted basis, the per-share earnings fell to $0.99, a penny above analysts’ expectations.

TGT’s earnings are projected on Wall Street to be far more bullish as that retailer—long dealing with marketing and internal struggles of its own, as the financial press has made clear—now runs under a new leader.

By the numbers, analysts polled by Thomson Reuters pin average expectations for Q3 profit of $0.86 per share, up 59%-plus over the year-ago period. Since then, TGT has said it pulled in operating costs and announced that it is closing 13 money-losing stores. The effect of those moves on profit is underscored by a projected 1% pullback in Q3 revenue to $17.60 billion.

Historically, TGT has met or outpaced Wall Street’s expectations in every quarter for the past five years. In the prior quarter, TGT turned in earnings of $1.22 a share, up 56.4% from the year earlier. Revenue in that quarter was up 2.5% to $17.43 billion.

FIGURE 1: MOVING TARGET?

Shares of retailer Target (TGT), near $72, are at their lowest in about a year. On a year-over-year basis, TGT’s stock is up nearly 8% but it has advanced as much as 26% throughout that period, peaking at $85.81 in late June. Since then, the stock has retreated better than 15%. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

What Could Stock and Option Action Tell Us?

Action has picked up on this stock leading up to earnings. The implied volatility ranks at the 95th percentile. Short-term options traders are pricing in a potential 5.75% move in either direction for the stock around earnings, according to TD Ameritrade’s thinkorswim® platform’s Market Maker Move indicator. We’ve seen some increased selling interest in the at-the-money 70.5 put options that expire on Friday, and increased buying of the 72 call options that also expire on Friday.  

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

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