For the American retail chain Target $TGT, it's worth digging into the more detailed numbers. On the surface, yesterday's report looked like an absolute miracle and the best quarter in years. Profit exploded and the stock rallied after the results.
For the second quarter, the company reported net income of $4.11 per share. Analyst estimates had expected a substantially lower figure. Revenue rose 5.3 percent year over year to $26.5 billion. Comparable store sales, which are key in this business, added a solid 3.8 percent. The stock responded with gains and reached new highs just below $162.
But there is one huge catch. A major part of this surprising profit growth does not come from selling T-shirts or groceries at all. Target booked a one-time benefit of $994 million from older tariff refunds into its results. This accounting maneuver alone added exactly $1.65 to the aforementioned earnings per share. Thanks to that, reported operating margin soared to nearly ten percent, which is an absolutely exceptional figure for ordinary retail.
But when you strip out this extraordinary and non-recurring income, you find that the core business is growing, but not revolutionary. Profitability, excluding the tariff refunds, actually improved by roughly one percentage point.
That doesn't mean management is doing nothing. Not long ago, the chain struggled with a huge overhang of unsold inventory, and people filled their baskets only with basic groceries. Now the trend is slowly reversing. The most important metric for me in this regard is physical store traffic. It rose by 3.6 percent. So customers are actually returning to the aisles, and according to management, they are starting to buy fashion and home decor again.
In my view, the market is currently somewhat neglecting the quality of the reported numbers. Investors simply saw massive year-over-year profit and aggressively pushed the stock price up. The company has evidently pulled itself out of the worst problems of recent years and finally has inventory under control. But the path to sustainable growth must be built on real sales, not on a one-time refund from the government apparatus.
A much more stable picture in this sector has long been shown by rival Walmart $WMT. In recent quarters, it has focused on brutal efficiency and doesn't need to rely on similar accounting injections to beat market expectations. Moreover, it is much better at appealing to higher-income customers as well.
Do you follow the developments around the big American chains at all, or do you prefer to avoid traditional retail because of historically thin margins and intense competition?
