Retail Earnings Confusion (TGT, WMT, SPB, ANF)

November 16, 2011 by Paul Ausick

Two earnings reports this morning offer a contrast in the fortunes of companies that are in different parts of the retail sales chain. Target Corp. (NYSE: TGT) reported adjusted EPS of $0.87 on revenue of $16.4 billion. The consensus estimate called for EPS of $0.74 on $16.27 billion in revenue. The company’s showing put yesterday’s report from Wal-Mart Stores Inc. (NYSE: WMT) in the shade.

The comparison to today’s report from Spectrum Brands Holdings Inc. (NYSE: SPB) couldn’t be plainer. Spectrum, a subsidiary of Harbinger Group Inc. (NYSE: HRG) that owns brands such as Ray-o-vac, Remington, Black & Decker Home, Cutter, and Tetra, reported adjusted EPS this morning of $0.47, compared with analysts’ consensus estimate of $0.59. Revenue totaled $827 million, short of the consensus estimate of $836 million. The company’s unadjusted EPS loss for the quarter totaled -$0.65.

Spectrum took an non-cash impairment charge of $32.5 million onnon-cash intangibles in the quarter. That decline in brand value could well have repercussions through the company’s revenue and earnings going forward. After all, in retail sales, brands carry a lot of punch and reducing the value of a brand is never a good sign.

The company going after the bargain shoppers with its Spectrum Value Model, which the company’s CEO said produces “higher margins and lower acquisition costs to our retail customers.” That’s a fine strategy if the Spectrum itself can make money on it.

That’s the rub. Spectrum’s CEO also noted that the company is “offsetting significant commodity and Chinese cost increases through our continuous improvement programs, restructuring and integration cost synergies programs, retail distribution gains, and select pricing actions.” Revenue grew by 4.9% in the quarter, but gross profit only grew by 2.2%. Spectrum apparently can’t keep up with its cost increases, but it has put itself in the position of not being able to raise prices enough to offset those increases. That’s the impact of winning a race to the bottom.

Target’s revenue grew by 5.4%, while its earnings before interest payments and income taxes grew by 9.7%. At Walmart, the story resembles Spectrum’s more than it does Target’s. Revenue grew by 8.1%, but income before taxes grew by just 4.9%.

Walmart survives on its volume, of course — $110 billion in quarterly revenue compared with $16 billion at Target. Spectrum’s total sales volume just aren’t enough to make that happen. So in addition to lowering prices, the company is trying to acquire growth. Spectrum announced on November 1st that it had acquired insecticide brands Black Flag and TAT for an undisclosed sum. The company also raised $200 million earlier this month that the CEO says will be used to close other acquisitions in its home & garden and pet supplies divisions. The company plans to do that by increasing its cost synergies, i.e., firing people.

On a further note, teen and young adult retailer Abercrombie & Fitch Co. (NYSE: ANF) is getting pounded after its results.  This one is down 13% at $48.45 and its 52-week trading range is $45.72 to $78.25.

Target’s shares are up about 1.7%, at $54.09, in a 52-week range of $45.28-$60.97. Spectrum’s shares are down more than -2%, at $24.87, in a 52-week range of $20.11-$36.61.

Paul Ausick