Trader Mark submits:

Nothing new here for blog readers - this earnings report essentially reinforces everything we've been saying will be happening to the US consumer for nearly a year now. But since it is a bellwether company, and reflects the middle class more than Walmart (WMT), along with the "we were trying to be upper middle class, or lower upper class by spending above our means for years, and extracting home equity.... but we're heading back down" subset of Americans, I watch this one very closely. Frankly, the charts of Walmart v Target (TGT) tell the tale...

....the guys on CNBC will tell you that Walmart is now operating so much better, (a stroke of genius hit them about 12 months ago - out of the blue!) and Target has lost their way, blah blah. Nonsense. People are moving downstream - Target was an excellent retailer for years, and did not suddenly get dumb 12-18 months ago. The economy turned, and their shoppers are migrating to Walmart. I wrote about this in December [Dec 26: Target Shoppers Turning into Walmart Shoppers]

In my piece 'Do the Bottom 80% of Americans Stand a Chance', I (virtually?) penned a lot of the long term issue hitting the "middle class". I also talk a lot about tell stocks - Fedex (FDX) or UPS (UPS) for the general economy, Coach (COH) for the aspirational upper middle income/lower upper income [Coach (COH) Imploding]... we also are getting a lot of hints from companies like Starbucks (SBUX), Harley Davidson (HOG), etc on the stressed US consumer.

To that "tell" list we should watch Target (TGT). Target is one of the best run retailers in America - but the past few months the news flow has just gotten increasingly worse. So unlike say a Sears Holding (SHLD) which is full of badly run Kmart stores, when one of the best of breed retailers is struggling, you take notice. With a not so great retailer you might think, well maybe they have issues with execution but Target is not that kind of company. I think what is slowly happening is more and more Target shoppers are becoming Walmart shoppers... not by choice.

So before we get to the numbers, don't get caught into the "better than expected" nonsense you hear from this or any other retailer, by the pundits. We care about year over year performance - most retailers are sucking wind. Only because expectations have been slashed so severely do we get these "beats". Other important notes

1. Same store sales matter
2. The composition of sales matter - are people buying cheaper stuff with lower margins?
3. Inflation (which I believe to be 12-15% in many goods, and higher in some) is not part of the reporting - meaning if good XYZ is 5% higher than last year, then sales should be up 5% just to hold units sold flat. Thus we should be seeing a large uptick in REVENUE just to keep UNIT sales flat. We are not seeing that, which shows that unit sales are being destructed.
4. The bottom line is profits - some retailers are discounting to such a degree that they ARE driving top line (revenue) but since they discounted so heavily it is not helping their bottom line.
5. In the end, stocks should be valued on their stream of earnings / cash flow. This is why it is ridiculous that stocks get pushed up for "better than expected" when their year over year profits are falling - this means their stocks are getting MORE expensive. But as long as people cling to a recovery in "6 months" they can justify buying these stocks (at any price) since the earnings rebound will be happening "soon".
6. Until evidence is so overwhelming to the contrary, the lemmings on Wall Street will cling to the "everything will be fine in 6 months" theory. They've been clinging to it since last July. One day the squirrel will find the nut, and they'll be correct. But it sure won't be the next 6 months.

Let's peek a bit closer at Target.

• Target Corp (TGT) reported a 7.5 percent decline in quarterly profit on Tuesday as shoppers passed over clothes and jewelry in favor of basics like food, hurting the retailer's margins.
• But as the U.S. economy has faltered, so too have Target's sales, particularly of higher-margin items, as shoppers forgo purchases of new clothes and home furnishings to concentrate on necessities.
• Sales, excluding credit card revenue, rose 5 percent to $14.3 billion, boosted by new stores openings. But sales at stores open at least a year, a key retail gauge known as same-store sales, fell 0.7 percent. (again, I cannot stress how bad that is in an INFLATIONARY environment - if food costs are up 10, 15, 20%, yet same store sales are receding - what does that say? Very bad things. Same for any other product that is going up in price - even if you believe the government reports on inflation, sales should be going up 3-4% a year, just to stay flat)
• Its first-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise.

Again folks, we have not even "begun" the recession according to the pundits. Most food costs have not been passed onto the consumer. Most coal and natural gas prices have not been passed onto the consumer (only gasoline has) What happens in 6 months from now? 12? Oh yes... the consumer recovery. The consumer dealing with 2-3% wage increases. The US needs a new asset bubble and fast... cmon Ben, keep printing, maybe we can get a new stock bubble since housing is out of the question for the next few years. That'll get those Americans spending again!

I'll keep repeating this - almost everyone under the age of 50 on Wall Street only knows short, shallow, Fed providing pacifier recessions. Easy in, easy out, corporate-dominated. The consumer has been running hard for 25 years. This time around we have a credit crisis, a housing bubble, and inflation. Everyone has been conditioned to buy a few months into a recession (not that there is one of course) because if you buy 3 months in (to a recession that does not exist), we are out in 3 months from that point. They do not think or even consider possible an era like the 70s or early 80s. Let's review... high prices in goods, led by oil "shock", and lack of growth. A consumer under attack from all directions. Doesn't sound at all familiar, does it?

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