Are Investors Overreacting to Target Corporation's Latest Guidance?

By Nicholas Rossolillo Markets Fool.com

Target (NYSE: TGT) stock has tumbled in the past few weeks. The company downgraded fourth quarter and holiday shopping results, reversing management's previous upbeat outlook headed into the all-important end-of-year period. While the news was discouraging, there is more to consider before making any decisions as an investor.

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Image source: Target.

First, the details . . .

For November and December, Target said that comparable-store sales and total sales decreased 1.3% and 4.9%, respectively. However, the total sales drop was due to the sale of the pharmacy business last winter. Overall transactions enacted at Target were flat compared with last year.

As a result, fourth quarter and full-year profit guidance was also downgraded. Fourth quarter earnings are expected to come out to $1.45 to $1.55 per share, down from $1.55 to $1.75. For the whole year, earnings are now expected to be $4.57 to $4.67, compared to the $4.67 to $4.87 outlook given a few months ago.

The stock is down by more than 10% in response to the business update.

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Data by YCharts.

Target blamed disappointing foot traffic in stores for the weak results, especially during the early part of the holiday shopping season. Groceries, electronics, and entertainment sales led the declines.

Investors can still find solace in the fact that digital sales helped pull the numbers up. Online transactions were up over 30% compared with last year, sustaining a double-digit growth rate that has been intact for a couple years now. Target's promotion of its digital selling capabilities continues to pay off. The retailer's signature lineup, which includes style, baby, and wellness products, also notched single low-digit growth in the fourth quarter.

The same old song and dance

This is not the first time this year Target has let investors down with guidance. Over the last 12 months, the company has adjusted its outlook several times, and the market has reacted each time in a similar fashion:

Data by YCharts.

Cracks started to appear in late spring, but investors held out hope that the company could deliver. As those hopes faded, share prices dropped. A revival in optimism came in the fall, only to be knocked down once again last month.

The takeaway here for investors is to not get caught up in the moment. The retail industry is an erratic animal to try and predict, especially right now, with the industry in flux as it transitions to a digital format. Trying to predict where prices will end up each quarter while management keeps adjusting its outlook is a fool's errand.

This wild trend could continue as Target tries to settle into the right mix of physical stores and online sales. While the latter is still a small portion of its business, the good news is that it is growing at a much faster pace than the 11% growth the online-only retail industry had in 2016.

What to look for (and not to look for) in the next report

There is more good news to look for in the next earnings release. Management still expects adjusted earnings per share, which eliminates early payoff of debt and other non-comparable metrics, to hit all-time records for the 2016 fiscal year. This comes in spite of the heavy discounting and promotional activity that the company used during the holiday shopping craze.

Target typically announces full-year results during the second half of February. When the report comes out, the company will likely give another round of guidance for the next year. Take it with a grain of salt, and avoid the myopic decision-making many investors employed this past year.

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Nicholas Rossolillo owns shares of Target. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.