Target's Results Suggest the Bottom is in Sight

Following a difficult day for U.S. stocks, the major U.S. indexes are all rising Wednesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI -0.11%) up 0.62% and 0.79%, respectively, at 10:20 a.m. EDT. Pundits pointed to poor results from retailers as one of the factors behind yesterday's stock market losses, but today is a bigger day for retail company earnings, with Lowe's, Target (TGT -0.70%), and Tiffany all reporting before the market open. Also on investors' agenda today: the release of minutes from the Federal Reserve's last rate-setting meeting and Hewlett-Packard earnings after the market's close.

The best that can be said about Target's fiscal first-quarter results is that they weren't as bad as they might have been. Revenue was in line with Wall Street's expectations for a modest year-on-year bump, and adjusted earnings per share came in at $0.70, a penny shy of the consensus estimate (see table below). They weren't as bad as Target had expected, either: the midpoint of Target's prior guidance for EPS was $0.675.

*Adjusted EPS. Source: Target, Thomson FN.

They beat my expectations, too. When I covered Wal-Mart Stores (WMT 1.32%) first-quarter results last week, I wrote that the megaretailer's middling performance did not bode well for Target's revenue due to the massive customer data breach the latter suffered, but the actual spread was pretty small. Wal-Mart's U.S. same-store sales fell 0.1% in the first quarter, compared to a 0.3% drop at Target. (Both also look pretty consistent with the latest Commerce Department reading of U.S. retail sales, which gained just 0.1% in April.)

The trouble is that the preceding discussion relates to "banked" results, while stock prices reflect expected future cash flows. On that front, Target reset expectations lower with disappointing guidance for the current quarter and the full year. The company is forecasting EPS of $0.85 to $1 in the second quarter, compared to a consensus estimate of $1.02; it lowered its full-year guidance range to $3.60 to $3.90 (outside the consensus estimate of $3.98).

Despite all of this, the stock is (oddly) higher by 0.6% this morning, which suggests that the pessimism that is plaguing the shares may have peaked (for now, at least); yesterday's closing price of $56.61 was less than 4% above the stock's 52-week low, reached at the beginning of February.

These quarterly results and the company's outlook are the latest evidence that Target is facing a crisis -- not an existential one, but a crisis that nevertheless demands deliberate, forceful action. The company appears to be taking its problems seriously: it shelved CEO Gregg Steinhafel earlier this month and replaced the head of its loss-making operations on Tuesday. Much remains to be done, and investors will need to see some positive momentum in the company's operations before they rerate the stock. For now, the shares look like they offer no more than adequate value.