What Next Target Earnings Will Tell Us About Big Retail’s Future

Long-term trends often get obscured by short-term volatility. Big Retail is a prime example, especially considering developments in the sector in the past year to year and a half. It may seem surprising now, but a 10-year chart of Target Corp. (NYSE: TGT) and Wal-Mart Stores Inc. (NYSE: WMT) plotted against the broader S&P 500 and the Dow 30 shows remarkable stability and constancy for the large retailers. Both the Dow Jones Industrial Average and S&P 500 are up close to 50%, while Wal-Mart and Target are slightly behind at 40% and 32% higher respectively.

One other notable feature of the chart is that Wal-Mart shares are going through what Target went through in 2014: a large decline, followed by a decent recovery. Both chains have had to downsize lately, with Wal-Mart closing 269 stores globally and Target exiting Canada and handing its pharmacy business to CVS Health Corp. (NYSE: CVS) in an attempt to focus on core business.

Target’s upcoming earnings on February 24 will provide good clues as to the direction of Big Retail for the years to come, essentially whether it will continue to keep general pace with the S&P and the Dow, or whether the sector will stagnate and fall. We will begin to see the effects of downsizing and regrouping and whether it is helping. While Wal-Mart’s store closures have yet to happen, let alone have a meaningful effect on its earnings and balance sheet, Target’s exit from Canada is already completed and its pharmacy handover to CVS is done.
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The results post-Canada exit are not awe-inspiring. The stock is pretty much stagnant since the move. But the handover to CVS only happened in December, so for the first time we will see the full effects of both moves on the top and bottom lines. If there is another earnings disappointment, it certainly won’t bode well for Wal-Mart. But an earnings beat will tell markets that downsizing and refocusing are exactly what the sector needs.

Essentially, Target’s next earnings will help tell us whether brick-and-mortar retail is slowly shrinking and shriveling up in the face of e-commerce, or whether it has only temporarily retreated in order to regroup as a more focused and efficient operation, perhaps to find new growth opportunities elsewhere. For Wal-Mart shareholders, that means positive earnings for Target could mean that shares will continue their recovery after the nightmare of 2015, while a disappointment could be signaling that the bounce won’t last.