The Corporate America steamroller that is the coronavirus has found its way to Target.
Target’s business has entered unprecedented waters amidst the coronavirus, as detailed in a new press release Wednesday morning. Some businesses in household essentials (see toilet paper and hand sanitizer) are exploding as Americans panic shop. Meanwhile, more discretionary businesses (see seasonal apparel) are starting to fall by the wayside as consumers fret over job loss.
Net net, you have a Target that is absent a lot of bottom line visibility at the moment. And as a result, you have a top-notch retail CEO in Brian Cornell taking a more cautious stance than his usual breakneck growth pace for the balance of the year.
“America is out of business,” Cornell told Yahoo Finance on a media call when asked about current recessionary conditions in the U.S. at the hands of the coronavirus. Cornell suggested business trends have continued to be volatile into March after a solid February.
Quick facts: What Target just divulged
130 stores remodels in 2020, down from a prior expectation for 300.
15 to 20 small-store format openings in 2020, down from a prior expectation for 36.
Efforts to add fresh grocery and adult beverages into drive-up and order pickup services temporarily on hold.
February comparable sales increased 3.8%.
March to-date comparable sales have surged 20%. Comparable sales in essentials and food and beverage are up more than 50%. Comparable sales in apparel and accessories (higher margin categories) are down more than 20%.
Warned on gross profit margins for the first quarter as lower margin food and household essential goods skyrocket.
$300 million in extra costs seen in the first quarter amid investments in employee pay and benefits, additional hours dedicated to cleaning stores and distribution centers and higher supply chain costs.
Company withdraw its first quarter and full year sales and earnings per share guidance. Previously, Target expected:
First quarter: low-single percentage increase in comparable sales; adjusted EPS of $1.55 to $1.75.
Full year: low single digit increase in comparable sales; adjusted EPS of $6.70 to $7.00.
It’s unlikely Mr. Market will like this update from Target, even if the warning comes at the hands of a highly unpredictable health scare.
For starters, Target’s stock has outperformed the S&P 500 during its entry into a bear market this month (14% drop compared to a 27% decline, per Yahoo Finance Premium data) as investors viewed it as a relative safe-haven. The call wasn’t totally misguided as Target’s stores are clearly packed with people stocking up to ride out state mandated self quarantines. And, Cornell didn’t pull the dividend today and announce he would be tapping Target’s credit lines (as we have seen from other retailers these past few weeks).
But what the market may have under-appreciated with Target is how quickly consumers are trading down in such a recessionary backdrop. The same goes for the added costs Target is incurring to satisfy frantic levels of customer orders and to clean stores and distribution centers. Factor those things in, and it’s probable the market has to adjust Target’s price-to-earnings multiple of 15.7 times to something closer to the S&P 500’s 14.5 times (but not totally in line, as Target’s business is clearly holding much better than others in Corporate America).
We will say this, hat tip to Cornell and his long-time peer (and one-time co-worker at Walmart) in Walmart CEO Doug McMillon — both are showing tremendous leadership for employees and consumers during this challenging time. Eventually that will be rewarded by the market, just not this week.