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By most measures, Target (NYSE: TGT) reported disappointing second quarter results Wednesday.
Target pre-announced its second quarter results on August 5. At that time the retailer cut its second quarter earnings to $0.78 from a prior guidance of $0.85 to $1.00.
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On Wednesday, Target reported its revenue rose 1.6 percent from a year ago to $17.4 billion. The company also reported that its U.S. comparable-store sales were flat in the quarter while comp sales in Canada fell 11.4 percent.
Target's U.S. gross margin fell 100 basis points to 30.4 percent, while its Canadian operation saw its gross margins fall 1,320 basis points to 18.4 percent.
UBS: Oh Canada!
Jason Derise of UBS believes that Target is unlikely to divest its Canadian operations. Therefore, investors should value Target as a whole along with Target Canada's the near-term headwind that could pressure shares further.
Derise adds that Target's best course of action is to remain committed to turning around its Canadian operations. In fact, the analyst believes that Target Canada is fixable and can achieve break-even in calendar year 2017.
“We think an exit is likely messy and drawn out including high dead rent expense, without an obvious single buyer of the locations in Canada,” Derise wrote in a note to clients on Thursday. “We think Target's best option for shareholders is fixing the business.”
Derise notes that Target's most encouraging commentary from the quarter is the company's improvement in comps during July and August is related to new products and occasion based shopping, and not due to promotional activity.
Target has focused on improving its private label offerings, which Derise believes could translate to mid-single digit EBITDA growth.
However, Target Canada's woes will continue to affect shares. Derise is now forecasting Target Canada's results will translate to an earnings per share dilution of -$0.54 in fiscal 2016 (calendar year 2015). Previously, Derise projected a -$0.45 earnings per share dilution.
Shares are Neutral rated with a $57 price target.
Deutsche Bank: More risk than reward
Paul Trussell of Deutsche Bank believes that shares of Target have an unfavorable risk to reward.
Trussell notes the positives in Target's earnings report include a lowered bar for the second half of the year, favorable same-store-sales trends in July and August, accelerated online growth and leveraged expenses in the U.S. despite flat comps.
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However, the negatives outweigh the positives.
In addition to declining gross margins and Target Canada's negative contributions, Trussell points out that the second quarter marks the seventh consecutive quarter of year over year traffic declines. Additionally, a slowdown in Redcard penetration is expected to continue throughout the year.
With no plans for a share buyback in the third quarter and beyond, and a lack of a new strategic plan from Target's CEO Brian Cornell, Trussell recommends investors remain on the sidelines.
Shares are Hold rated with a $55 price target.
Jefferies: Remain cautious as a turnaround is costly
Daniel Binder of Jefferies believes that hope exists for Target's future, but a turnaround requires significant cost and time.
“It is unclear how involved the new CEO was in the resetting of guidance but shares reacted today with some optimism that the bar was finally set low enough,” Binder wrote in a note to clients on Thursday. “While we are hopeful this is the last cut for the year, it is difficult to get more constructive as we remain in a downward EPS revision cycle.”
Binder notes that Target's statements that it will moderate promotional activity will result in less margin pressure. However, the analyst questions if this is the best strategy as comp store sales are showing signs of improvements.
Target Canada can be fixed as management believes that system issues are part of the problem. Binder states that timing and costs on these system fixes are “unclear.”
Shares are Hold rated with a $55 price target.
Piper Jaffray: Momentum to develop from encouraging trends
Sean Naughton of Piper Jaffray believes that Target will benefit from encouraging signs seen in the second quarter.
Target's results were largely in-line with the company's pre-announcement on August 5 which resulted in a muted investor reaction.
Target Canada remains a challenge for the company but the analyst notes that management is taking steps to fix core issues.
“The U.S. continues to recover from last year's data breach with the costs now in the rear view mirror and transaction trends getting less worse,” Naughton wrote in a note to clients on Thursday. "We are sticking with our Overweight rating as we are encouraged by positive comp trends for the last six weeks, the potential to exit Canada for a low incremental cost relative to the current cash drain, and the company's real estate assets, which provide a valuation backstop."
Shares are Overweight rated with a $68 price target.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.