Schaeffer's Trading Floor Blog

What to Expect From a Post-Earnings Target Corporation (TGT)

Dissecting TGT's post-earnings numbers

by 2/27/2014 7:28 AM
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Target Corporation's (NYSE:TGT) earnings came out yesterday and the actual numbers weren't so pretty.

Target Corp said on Wednesday that its fiscal fourth quarter profit fell to $520 million, or 81 cents a share, from $961 million, or $1.47 a share, a year earlier. Total revenue fell 5.3% to $21.52 billion.

How could this company possibly come up short? Judging by the random sample of "my immediate family" and projecting those numbers out assuming everyone else frequents Target as much as we do, I would have guessed revenues of about $21.53 trillion or so. Maybe the fact that they were a tad careless with everyone's confidential information drove customers away?

Or perhaps it was something even more nefarious?

Canadian operations dented fourth-quarter profit by 40 cents a share, the company said.

Aha! Sure, they can win the gold medal in hockey but they can't trudge through the snow and shop? Who could have possibly anticipated cold weather in Canada during the winter anyway? As Canada's greatest export Rush once (sort of) sang, "You can choose a ready guide in some celestial voice. If you choose not to shop at Target, you still have made a choice."

But alas, the market must have anticipated all this, as Target rallied 7% yesterday on the news. Actually, the market apparently feared much worse. The stock is fresh off 52-week lows and the implied volatility hit new highs just ahead of the number.

Schaeffer's Implied Volatility for Target Since February 2013

To put that into a little context, 10-day historical volatility (HV) in TGT was 15.5 before the earnings, a pretty normal number for the name. So, implied vol of 28 is somewhat high. After the number, implied volatility sank to 20.8. Incidentally, 10-day HV is now 28 thanks to the gap in the stock. Quick lesson: Buying "cheap" volatility after the news is already out is often fool's gold.

It's likely a bit of a relief rally; it's still a pretty ugly looking chart. There's probably decent support now in the 55-56 level, and of course there's now a gap between here and there, but the high 50s-low 60s area is neither here nor there in my humble opinion. And implied volatility will likely drift further, as it looks "fair" in the mid-to-high teens.

So barring something unforeseen, like Australia or New Zealand picking up the shopping slack from our Northern neighbors, this stock looks like a yawner after this earnings reaction runs its course. And since I have no idea whether they actually have Target stores in Australia or New Zealand, I'm going to pass.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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