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Wal-Mart Stores, Inc. (WMT) – Why Target Corporation (TGT) Matters — and Why the Fed Doesn’t

Although we don’t believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes — just in case they’re material to our investing thesis.

U.S. stocks opened slightly lower this morning, with the S&P 500 (INDEXSP:.INX)) and the narrower, price-weighted Dow Jones Industrial Average (INDEXDJX:.DJI) down 0.13% and 0.19%, respectively, as of 10:05 a.m. EDT.

In fact, stock markets worldwide are lower today, with the MSCI World Index near a six-week low. Nervous, short-term money is anticipating today’s release of the minutes of the Federal Open Market Committee’s July meeting (the FOMC is the group of officials that set monetary policy within the Federal Reserve).

Target Corporation (NYSE:TGT)To a genuine investor with a longer-term outlook, this anticipation ought to appear quite contrived: The minutes are unlikely to contain any game-changing clues regarding the gradual ending of the Fed’s bond-buying program. Instead, expect them to be consistent with the message that Fed officials, including Chairman Ben Bernanke, have been hammering on about for the past few months: “Tapering” is likely to begin later this year but remains wholly conditional upon the evolution of “incoming” economic and financial data.

Furthermore, what could it possibly matter to business values whether the tapering begins in September, October, or even early next year?

Last Friday, I highlighted what I thought was the most important trend of the week: a terrible string of earnings reports from some of the nation’s best-known retailers. However, one key name was missing from that list: Target Corporation (NYSE:TGT), which reported its fiscal second-quarter results this morning.

Target Corporation (NYSE:TGT) is important for a couple of reasons. First, it’s the nation’s second-largest retailer, well ahead of the names we mentioned last week (excepting Wal-Mart Stores, Inc. (NYSE:WMT), of course):

 Company Trailing-12-month revenue
Wal-Mart $473 billion
Target $73.1 billion
Macy’s $27.9 billion
Kohl’s $19.3 billion
Nordstrom $12.5 billion
J.C. Penney $12.1 billion

Source: S&P Capital IQ.

Second, it’s arguably the general-merchandise retailer with the broadest appeal, thanks to its “cheap-and-chic” branding. As such, its results are the best indicator of general consumer sentiment.

With that in mind, here are the numbers: Target Corporation (NYSE:TGT) earned $0.97 per share in its second quarter, a penny ahead of Wall Street’s consensus estimate. However, revenue came in just shy of Wall Street expectations, and revenue from stores open at least a year rose by a meager 1.2%, falling short of the company’s own forecast of 2% to 3%.

Furthermore, the company said it now expects to come in at the low end of its full year earnings-per-share guidance range of $4.70 to $4.90 — a range it lowered in May from $4.85 to $5.05. Finally, chairman and CEO Gregg Steinhafel said in a statement that he expects U.S. shoppers to remain cautious “in the face of ongoing household budget pressures.”

Bottom line: Target Corporation (NYSE:TGT)’s results appear to confirm last week’s disappointing data. Consumer sentiment is lackluster, and investors should expect weak growth to continue to plague this recovery. That’s an extra reason to remain value-conscious while seeking secular growth opportunities.

The article Why Target Matters — and Why the Fed Doesn’t originally appeared on and is written by Alex Dumortier, CFA.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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