Blowout Results May Not Sustain Target’s Rally 

We Want To Buy More Target But At Lower Price 

Target (NYSE: TGT) has had a fantastic 2020/2021 months and for good reason. The company’s strategy had it aligned to meet consumer needs so when the pandemic struck Target was ready for business. Since then the company has produced a sustained uptick in business that we don’t see flagging. What we do see is a period of tough comps and a time of increasing headwinds. The next quarter not only brings the first comps against the 2020 COVID-induced surge in sales but faces rising inflationary pressure in the form of labor, freight, and inventory not to mention a shortfall of workers, diminishing effects of economic stimulus checks, and the impact of inflation on the consumer. While Target remains a top name on our list of must-have stocks it’s one we think can be bought at a cheaper price. 

Target Reaches A Peak In Q1 

Target reached a peak in Q1 that we think will cap share prices in the near term at least. The company hasn’t stopped growing but growth has stopped accelerating and already begun to slow. While great for Target’s long-term value and dividend-paying value, it could result in a pullback or full-blown correction in the not-too-distant future. So, while Target’s $24.2 billion in revenue is great now, the comps are about to start getting tougher and headwinds are emerging in the consumer sector. 

But, back to the present, Target’s Q1 revenue is up 23.3% from last year and beat the consensus by more than 1000 basis points. The gains were driven by a 22.9% increase in comp sales that can be attributed in large part to stimulus checks this past winter. Comps beat the consensus target by more than 1000 basis points as well with strength in both in-store and eCommerce channels. In-store sales increased by 18% while digital sales increased by 50% across all channels to account for 18% of total revenue. Within that, same-day services increased by 90% and drive-up/curbside increased by 123%. 

The company was able to leverage the gains and widen margins at the same time but this too has peaked. The gross margin increased by 490 basis points to 30%, 140 bps better than consensus, to drive a 330 basis point beat at the operating level. The gains in margin and revenue resulted in high-triple-digit increases in earnings that also beat the consensus. On a GAAP basis, the company reported $4.14 in EPS or $2.17 better than expected and adjusted EPS of $3.69 or $1.47 better than expected. 

The details that make us hesitate with this stock and think its shares have reached a peak is the guidance. The guidance is good in that execs are forecasting mid-to-high single-digit growth in the 2nd quarter and mid-singe-digit growth in the second half but it’s bad that growth is slowing and margins will contract. The company is expecting to see the full-year operating margin below 8.0% or nearly 200 basis points less than in the 1st quarter. This may be nit-picking but we see rising inflation as a headwind to both revenue and earnings growth and one that may be underestimated by Target. 

The Technical Outlook: Target Surges To New High

Shares of Target surged more than 5.0% in the wake of the earnings report to set a new high. The high is more than 140% above the March 2020 low and well above the 150-day moving average. The indicators are bullish but both the MACD and stochastic come with red flags. The stochastic is overbought and MACD divergent from the new high which reveals some underlying weakness if not a high potential for a correction. If prices do correct we expect to see them retest support at the $200 level and possibly as low as $180 or $190 before hitting bottom. Until then, investors can count on the dividend but they may not want to. At only 1.32% there are better places to put new money to work right now.

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Under Armour Shares Gap Lower As Judge OK's Shareholder Lawsuit

Although that’s not great news for the company, most of the stock’s movement is likely due to the slaughter in the broader market, as the S&P 500 gapped down 1.14%, led by weakness in big tech firms. Concerns about the fall in cryptocurrencies, which remove liquidity from global markets, is also a factor. 

Under Armour, whose logo seems to be ubiquitous on workout apparel and the growing category of “athletic leisure” clothing, has been consolidating below its May 5 high of $21.82. It rallied 7.15% that day, following the company’s first-quarter earnings report. 

The company reported earnings per share of $0.16, up from a loss of $0.34 per share in the year-earlier quarter. Revenue was $1.257 billion, up 35% from a year ago. Both U.S. and international sales drove the revenue increase. 

That revenue figure, in particular, marks a turnaround for Under Armour, whose sales began slowing in 2019, well before the pandemic. Earnings growth accelerated over the past two quarters, and topped analysts’ expectations in the first quarter.

The stock advanced 27.55% year-to-date and 160% over the past 12 months. However, over the past three months, Under Armour is up only 2.54%. 

Late last year, the stock struggled to rebound from the spring pullback. Shares began rallying in earnest in September, and are up 115% since then, despite retreating 7.68% this month.

Shares are trading between $18 and $19, their best levels since January 2020. 

Only Brief Periods Of Strong Rallies

However, other than a strong run-up in 2017 and 2018, as well as over the past year, the stock has never lived up to its “growth” hype, in terms of share price appreciation. 

Current broad-market wobbles aside, there may be reason for optimism about the stock. 

Often a new CEO can begin a turnaround at a company. Patrik Frisk was named to the top job in January 2020, succeeding founder Kevin Plank, who remains the firm’s majority shareholder, and as such, still has a voice at the firm. 

Frisk began slashing expenses, as well as improving internal processes and jump-starting marketing initiatives. 

When it reported first-quarter results, Under Armour boosted its full-year revenue guidance. 

In the earnings release, the company said it expects sales to grow at a “high teens percentage rate,” up from its previous guidance of sales growth in the high single digits. It noted, however, that "continued COVID uncertainty" may affect results. Companies have to add disclaimers like that these days, despite a fast pace of reopening. 

In fact, inflation, difficulties hiring workers and other factors may have an even greater impact on company operations and revenue than Covid-19 itself. 

Restructuring Leads To 2021 Loss?

The company announced a restructuring plan last year, and that will also be seen in this year’s results. Due to pre-tax charges which will ding the bottom line, the company expects a loss this year. 

“We expect to deliver an operating margin of approximately 2% for an adjusted operating margin of approximately 4.5% in 2021,” said chief financial officer Dave Bergman in the earnings conference call.

“All of this takes us to a diluted loss per share of approximately $0.02 to $0.04, or excluding restructuring impacts, about $0.28 to $0.30 of adjusted diluted earnings per share. To sum it up, we believe we have appropriately updated our outlook to reflect the improvements we see across the business,” Bergman added. 

The stock is currently not one to consider buying, although it’s one to watch. Not only is current market weakness a factor in buy decisions, but this stock still has to prove it can launch a sustained uptrend, accompanied by heavy trading volume as a sign of strong institutional support.

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Don’t Rush To Buy Walmart, Extra Low Prices Are On The Way 

A Great Quarter For Walmart But Headwinds Are Growing 

Walmart (NYSE: WMT) had a great quarter. The problem we have with the stock right now is akin to what we’re seeing in Home Depot and other big-name retailers. The Q1 results were so good, even in the face of tepid employment gains, we suspect the next quarter won’t be quite so exciting. Not only is economic stimulus running out but weak labor gains and rising inflation don’t bode well for consumerism in general. We don’t expect to see Walmart flounder over the next quarter or year but we do see share prices struggling as the comps get tougher and YOY growth slows to a standstill. 

A Blowout Quarter For Walmart

Walmart had a blowout quarter with revenue up 2.7% from last year and 465 basis points better than the consensus. The 2.7% growth isn’t all that exciting by itself but it is on top of last year’s +8.7% comp which shows some lingering momentum in the consumer. The gains were driven by strong comp-store sales in the U.S. that were in turn driven by eCommerce. 

The U.S. comps increased 6.0% versus the 0.9% expected by analysts with eCommerce up 37% and contributing 360 basis points to the comp-store growth. eCommerce sales were strong across all channels and we don’t expect that to change. The ease and convenience of same-day pickup are without parallel. Sales at Sam’s Club were also strong at up 7.7% ex-fuel and 650 basis points above the consensus. 

Moving down the report the earnings picture is a little mixed. The company reported a slight gain in gross margins that was offset by higher operating expenses and flat YOY operating margin. The GAAP $0.97 in EPS missed by $0.26 but also includes the impact of recent divestitures while the adjusted $1.69 beat by nearly $.50. Looking forward, the company is expecting the strength to carry through into the end of the year and raised guidance but there is a caveat. Guidance is raised but the company is still forecast slowing sales growth, negative sales growth in the back half of the year, and a low single-digit decline in YOY revenue. 

The revenue guidance is offset by earnings guidance but even there we see a dark cloud. While EPS growth is expected to outpace revenue growth and come in positive for the year we see upward price pressure cutting into profits. The company says it is committed to keeping its prices extra-low and working with its supply chain to ensure that stays true but inflation is crawling into the economy fairly quickly. Not only is the cost of fuel on the rise but so is labor and materials costs and those will drive the cost of goods higher. 

The Walmart Dividend Isn’t In Jeopardy 

Walmart is a good company and on solid footing despite all this doom and gloom. The company has a solid balance sheet, ample cash, plenty of cash flow, and free cash flow, so we don’t see any threat to the dividend. At 1.55% the yield is a little low for our liking but we think the yield-to-value ratio will improve over the coming months. Regardless, investors can sleep well at night knowing this company has already declared the fiscal year’s dividends and should expect to see a 48th annual increase in early 2022. 

The Technical Outlook: Walmart Closes The Window, Shares Move Lower 

Shares of Walmart moved sharply higher following the Q1 release and closed with a gain for the day but we can only describe the price action as bearish. The price action opened near the top of an open price window, moved up to close the window, and then fell sharply lower to form a large red candle. Now, a day later, price action is indicated lower again with the broader market in retreat as well. If the stock doesn’t find support at the 30-day moving average we think shares of WMT could fall as low as $127.50 before finding a bottom.

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