Why Target Matters -- and Why the Fed Doesn't

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks opened slightly lower this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.13% and 0.19%, respectively, as of 10:05 a.m. EDT.

In fact, stock markets worldwide are lower today, with the MSCI World Index near a six-week low. Nervous, short-term money is anticipating today's release of the minutes of the Federal Open Market Committee's July meeting (the FOMC is the group of officials that set monetary policy within the Federal Reserve).

To a genuine investor with a longer-term outlook, this anticipation ought to appear quite contrived: The minutes are unlikely to contain any game-changing clues regarding the gradual ending of the Fed's bond-buying program. Instead, expect them to be consistent with the message that Fed officials, including Chairman Ben Bernanke, have been hammering on about for the past few months: "Tapering" is likely to begin later this year but remains wholly conditional upon the evolution of "incoming" economic and financial data.

Furthermore, what could it possibly matter to business values whether the tapering begins in September, October, or even early next year?

Last Friday, I highlighted what I thought was the most important trend of the week: a terrible string of earnings reports from some of the nation's best-known retailers. However, one key name was missing from that list: Target (NYSE: TGT  ) , which reported its fiscal second-quarter results this morning.

Target is important for a couple of reasons. First, it's the nation's second-largest retailer, well ahead of the names we mentioned last week (excepting Wal-Mart, of course):


Trailing-12-month revenue


$473 billion


$73.1 billion


$27.9 billion


$19.3 billion


$12.5 billion

J.C. Penney

$12.1 billion

Source: S&P Capital IQ.

Second, it's arguably the general-merchandise retailer with the broadest appeal, thanks to its "cheap-and-chic" branding. As such, its results are the best indicator of general consumer sentiment.

With that in mind, here are the numbers: Target earned $0.97 per share in its second quarter, a penny ahead of Wall Street's consensus estimate. However, revenue came in just shy of Wall Street expectations, and revenue from stores open at least a year rose by a meager 1.2%, falling short of the company's own forecast of 2% to 3%.

Furthermore, the company said it now expects to come in at the low end of its full year earnings-per-share guidance range of $4.70 to $4.90 -- a range it lowered in May from $4.85 to $5.05. Finally, chairman and CEO Gregg Steinhafel said in a statement that he expects U.S. shoppers to remain cautious "in the face of ongoing household budget pressures."

Bottom line: Target's results appear to confirm last week's disappointing data. Consumer sentiment is lackluster, and investors should expect weak growth to continue to plague this recovery. That's an extra reason to remain value-conscious while seeking secular growth opportunities.

Big-box retailers may face bigger long-term threats than dips in consumer spending. Find out which retailers are eating the megastores' lunch in The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." You'll see how two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
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S&P 500 INDEX CAPS Rating: No stars
TGT $68.77 Up +0.21 +0.31%
Target CAPS Rating: ***