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Target’s ‘cheap chic’ marketing could now apply to its shares, which have fallen from record highs on recent weak earnings. (Chris Young For The Globe and Mail)
Target’s ‘cheap chic’ marketing could now apply to its shares, which have fallen from record highs on recent weak earnings. (Chris Young For The Globe and Mail)

Target’s spring clouds could have silver lining Add to ...

Blaming the weather for poor corporate results isn’t cool, as Target Corp. is now discovering.

Shares of the U.S.-based discount retailer, which recently embarked upon a bold expansion into Canada, slumped 4 per cent on Wednesday after the company reported disappointing results that its chief executive pinned on “seasonal and weather-sensitive categories.”

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Some investors will scoff at a company using weather as an alibi for poor performance, but they should welcome Target’s selloff as a buying opportunity.

The first-quarter disappointments interrupt what had been an exceptional rally.

Before Wednesday’s setback, the shares were up more than 20 per cent this year, to a record high.

To be sure, the results were ugly: Net income fell to 77 cents (U.S.) a share from $1.04 a year earlier. Revenue rose just 1 per cent, missing expectations.

But there is little reason to worry about Target’s future if the extended winter was indeed the cause. A chilly start to the spring buying season put people off buying items, such as clothing and gardening supplies, which makes sense.

Sean Naughton, an analyst at Piper Jaffray, took a close look at the temperature differences this year – examining the average temperature where Target’s stores are located and then weighting the results by state. His conclusion: On average, spring 2013 was 2.8 C cooler than a year earlier.

If that doesn’t sound like a good reason to put off buying T-shirts, flip-flops and sunhats, consider that other key U.S. retailers have also been suffering this year.

Wal-Mart Stores Inc.’s U.S. locations showed a 1.4-per-cent decline in same-store sales. Kohl’s Department Stores Inc.’s same-store sales fell 1.9 per cent.

Target’s setback stings a little more, because it is seen as a star among U.S. retailers. It appeals to cost-conscious consumers with products that are also trendy – a “cheap-chic” appeal that gives it some cachet and has helped its foray into Canada.

By some measures, that expansion has been a success. Sales at the new stores in the first quarter exceeded Target’s expectations, which bodes well given that the expansion is still in its early stages.

The retailer opened 24 stores in Canada in March, and plans to operate in a total of 124 locations by the end of the year.

The stock is still relatively cheap next to its peers. The shares trade at 15.5 times earnings, which is in line with giant Wal-Mart but well below the 26 times earnings multiple for Costco Wholesale Corp., not to mention the sky-high valuations on various “dollar” stores.

Analysts are keen on Target. According to Bloomberg, the average target price on the stock implies a 12-month gain bigger than the implied gain for Wal-Mart or Costco.

As well, more than 80 per cent of analysts have “buy” recommendations on Target even after the release of the disappointing first-quarter results, versus just 50 per cent for Costco and 44 per cent for Wal-Mart.

With Wednesday’s slip, Target’s share price is back to where it was about two months ago.

Given that the U.S. economy is showing every sign of making a steady recovery, with a rising housing market and receding unemployment, it sure looks tempting.

 

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