These 4 Plunging Stocks Have One Subtle “Code Word” In Common

Take a look at these 4 plummeting stock charts.

Over the past year, these companies all did one disastrous thing.

Here’s what to watch for (and how to profit).

New Business Models Are Never Good News – Especially for This Stock

Several of the 4 charts I showed you above are companies we’re shorting in Zenith Trading Circle, so I can’t give you all the details. But over the past year, all of them have made drastic organizational changes phrased as “restructuring plans,” “new business models,” “new strategies” and other euphemisms in their earnings reports. Quite often these plans involve consolidating various branches of the company, closing stores, and laying off workers – all under the guise of improving efficiency and the bottom line.

Needless to say, when you hear a company is trying out a “new business model,” that should be a clue to look at their financials, because if their old one was working, they wouldn’t need a new one. What “restructuring” really means is “circling the drain.”

Nowhere is that more true than for Target Corporation (NYSE:TGT).

TGT reported 4Q16 adjusted EPS of $1.45, down from $1.52 a year ago and below consensus expectations of $1.51.  Same-store-sales dropped -1.5% and overall sales were down -1.0%.  Traffic was up a mere 0.2% and digital sales were up +34% year-over-year.  Discounting pressured gross margins, which dropped by 95 basis points.  The average ticket declines by -1.6%.  Earnings before interest and taxes (EBIT) fell by 6%.

As disappointing at the fourth quarter was, the company’s guidance for 2017 was much worse.  TGT forecast 2017 EPS of $3.80-$4.20, sharply lower than consensus expectations of $5.34.  The company is launching a “new business model,” corporate-speak for an attempt to reverse poor sales trends that are disrupting the entire retail industry.

The new business plan involves making itself more price competitive (without necessarily making itself the low-cost competitor in every market), launching at least a dozen new private label brands in the next two years designed to generate $10 billion of sales, shifting its supply chain to reduce the amount of inventory in-store, “re-imagining” stores (a fancy name for remodeling its stores to increase their appeal to consumers), and increasing the number of its new small format stores in urban and college areas.

On its analyst day, where is unveiled its new business model, TGT announced a series of changes to its merchandising, supply chain and stores that are going to significantly hit margins in 2017 with an expected $1 billion hit to EBIT in 2017 versus 2016 (leaving its EBIT margin at an expected 5.7% this year).  It also cuts its sales growth guidance to negative to low-single-digit same-store-sales growth, well below Wall Street’s previous expectations.  It said that gross margins are expected to decline by 60 basis points on pricing and the impact of shifting more sales to ecommerce. It also plans to spend more on SG&A. The company plans to spend $2 billion on capex this year and $7 billion between 2017 and 2019.

Target, like many American corporations, has been a big buyer of its own stock.  Under its current repurchase program, it had repurchased 133.1 million shares of stock through October 29, 2016 for an average price of $70.52 per share for a total cost of $9.4 billion. Those shares are worth $7.6 billion today and are likely to soon be worth significantly less. The company spent $3.7 billion buying back stock in 2016 and plans to reduce this activity in 2017 in order to maintain its credit rating, suggesting that it will limit buybacks to $1.5 billion.  It plans to maintain its $2.40 annual dividend (4.18% yield).  Like many companies, Target has focused on returning capital to shareholders when it should have devoted more capital to its business.

Wall Street did not greet TGT’s news with open arms. Barclay lowered its 12-month price target to $50, Goldman Sachs to $53 (from $67).  Others followed. All are being too optimistic.

I suggest that – as you do with many of our other collapsing retail stocks – you buy long-dated puts on TGT (about a year out). This is a stock with a big, red bull’s-eye on its back.

Sincerely,
Michael

5 Responses to “These 4 Plunging Stocks Have One Subtle “Code Word” In Common”

  1. Good Articles. If I had the capital I could make a good return on investment. I prefer Land or Real Estate. Unfortunately, I don’t have the capital. The old adage is correct – “You need money to make money.”

    John

  2. Steve Andersen

    Retail as we know it is dying but the the next generation retail will replace it. People still value the store experience. Some products and services are preferred in person. Also the store will move to a branded/guaranteed purchase experience for thousands of companies different from today. Inventories will continue narrow in store but expand to millions of SKU’s online. Big Data will constantly drive greater customer marketing and convenience.

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