In this MarketFoolery podcast segment, host Chris Hill and Motley Fool Funds' Bill Barker discuss Target's (NYSE:TGT) second-quarter report, which offered a modicum of good news. When Barker parses the numbers, however, he's less than impressed. The outlook it offered looked a bit light, too. But there are reasons for the company to be cautious on that score that have little to do with the currently tough environment for brick-and-mortar retailers.
A full transcript follows the video.
This video was recorded on Aug. 16, 2017.
Chris Hill: Let's start with Target. Second quarter profits look good, and probably more importantly for Target, same-store sales on the rise, and that comes after four straight quarters of falling comps. So, if you're a Target shareholder, you have to be happy about that.
Bill Barker: Yeah, it's better. The same-store sales are as close to flat in the positive category as you can get, really. Up 1.3% for the quarter, and the guidance is around 1% flat, plus or minus 1% going forward. So, not even really keeping up with the pace of inflation. So, it's better than a negative number, but this is what passes for good news in retail these days.
Hill: Do you think Target might be sandbagging just slightly? Because if the most important time of the year for retailers like Target is the holidays at the end of the year, the second most important time is back to school. And that's the current quarter. Whether they think they're going to beat it or not, it's absolutely in Target's interest and every retailer's interest to sandbag for the current quarter.
Barker: Well, it's generally a good way to go about giving your news, to be on the cautious side, so that when you beat, people are happy rather than disappointed. It keeps shareholders a little bit happier when you know what you're going to do and outperform it to some degree. The company really hasn't grown its earnings at all over the last decade. So caution is, I think, a good path for them to take.
Hill: Do you think, in hindsight, the decision to sell the pharmacy business to CVS was a mistake? Because at the time, it was seen, among other things, as, they're getting an infusion of cash, obviously, from CVS Health, and two, it enables them to focus more on their bread and butter. Brian Cornell, the CEO, one of the things he talked about at the time was, "This is going to enable us to focus on, among other things, clothing."
Barker: Yeah, I think there's a lot of sense in maintaining focus for something that has had as many operational problems as Target has had, to have one fewer headache and get a cash infusion on the way, which has allowed them to buy back some shares. And that's pretty much the story for Target, more or less over the last decade. Roughly the same amount of EBITDA, of earnings. If you go back to 2008. Not a great year on the whole, net income was $2.8 billion; over the last 12 months, $2.7 billion, a decade later in a better economy. So, really, that's the short story. The longer version is, they have taken down their share count from about $850 million to about $560. So, they've been buying back shares all along the way, rather than just trying to -- or, I'm sure they were trying to grow sales. Of course, spinning off the pharmacy business impacts that equation. But, really, what they've done is have a roughly stable business and bought back shares with a lot of the money.
Hill: By the way, shares of Target up about 3%, so there is some optimism about the latest results, and certainly their cautious guidance for the rest of the year.
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