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Investors pushed Target (NYSE: TGT ) stock lower this month after the discount retailer posted disappointing first-quarter results. Profit declines and weak sales in the quarter forced management to cut its full-year outlook for fiscal 2013. Target now forecasts annual earnings between $4.70 and $4.90 per share, down from its prior projection for earnings per share between $4.85 and $5.05. Same-store-sales offered another area of concern. In fact, it was "Target's weakest quarterly same-store sales performance since the Great Recession year of 2009," according to Sandy Skrovan of Planet Retail.
Some analysts went as far as to downgrade Target stock to a sell on the weak quarterly results. However, I think investors would benefit more by taking a longer-term perspective on Target. While quarterly results are helpful, they don't tell the whole story.
We're still in the early stages of Target's long-term growth strategy. This includes the retailer's recent expansion into Canada. In March, Target opened its first 24 stores in the Great White North, with plans to add another 100 to 150 Canadian locations by 2014. While I suspect that this initiative will payoff down the road, it will put a damper on earnings in the near term because of increased costs related to new store openings in Canada.
In this way, Target's entry into the Canadian market is a double-edged sword. However, investors shouldn't be discouraged just yet. Consider catalysts such as a new online tax bill, and the potential for double-digit earnings growth once Target's entrance into Canada is complete. These are some of the factors working in Target's favor, which could push Target stock higher in the years ahead.
Leveling the playing field
Similar to other brick-and-mortar retailers, Target has been fighting the negative impact of "showrooming" for years. That's because, until recently, Amazon.com (NASDAQ: AMZN ) was able to offer lower prices and affordable shipping without the burden of charging sales tax on most purchases. It used to be that Amazon was required to collect sales tax only in states in which the e-tailer had a physical presence, such as warehouses or distribution centers -- giving it an unfair advantage over Target stores.
However, the Senate passed a bill this month that would force online retailers to collect state sales tax on all out-of-state transactions. The House still needs to pass the bill, but for now, this bodes well for Target and other big-box stores.
To sell or not to sell
True, Target's recent quarter was rough. However, I'm confident that Target stock will reward investors over the next three to five years. From the strength of Target's brand to its growth opportunities in Canada, I think it wise for current shareholders to hold the stock and ride out any forthcoming volatility.
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