Managing expectations in Q2

There isn’t much drama heading into the release Wednesday of Target’s first-quarter financial results considering the company already indicated with the release of its April results that it would meet or exceed analysts’ consensus earnings estimates that stood at 86 cents at the time. That is a big improvement from a year earlier when earnings per share were 69 cents, and Target is now clearly riding a wave of momentum.

In recent monthly sales releases, the company has repeatedly said inventories are in good condition and credit operations have rebounded with fewer write-offs looming as delinquency rates have declined. The improved profit picture reflects shoppers’ willingness to spend more freely on the company’s higher-margin and more discretionary product offerings even as the company holds its own on the food and consumables side against Walmart’s relentless marketing efforts around price.

The challenge for executives now becomes managing analysts’ expectations, which means on Wednesday Target chairman, president and CEO Gregg Steinhafel and CFO Doug Scovanner will have a fine line to walk. They are sure to express confidence in the company’s strategies, but any update to earnings guidance and commentary regarding future performance has to take into account the reality that the nation is in the midst of a jobless economic recovery. There remains a huge swath of the population that lacks disposable income to shop at Target’s discount stores because they are unemployed. Target, like a lot of retailers, is experience improved profitability as a result of cost-cutting actions implemented during the past two years. The beneficial impact of those efforts will eventually diminish and stronger sales growth will be needed to drive profit improvement.