Target and Lowes reported their quarterly results today. Target’s results were atrocious and Lowes’ results were lackluster, to say the least. When you dig into the numbers for two of the largest retailers in the world, you can see our dying warped society clearly.
Target’s annual sales exceed $72 billion.
Lowes’ annual sales exceed $53 billion.
There are a couple data points that reveal the death of retail on the horizon. Target operates 1,925 stores. Lowes operates 1,835 stores. Prior to the 2008 financial collapse these two behemoths were opening hundreds of stores per year. Their scientific financial models spit out ever higher sales as they dominated their markets. It seems their assumptions were slightly optimistic. They’ve had their come to Jesus moment and now realize their expansion days are done.
Target has opened a grand total of 7 stores in the last year. Lowes will open 10 new stores this year.
Target is the poster child for awful management over the last seven years. Of their 1,925 stores, 1,795 of them are in the U.S. Their dreadful foray into Canada accounts for the other 130 stores. They had 1,719 U.S. stores in 2009. It costs approximately $25 million to construct and open a Target store.
In the last five years they have spent approximately $1.9 billion building new stores. Over this same time frame they spent $10.9 billion buying back their own stock. Think about that for a moment. Rather than investing in their business or giving the money back to shareholders through dividends, they bought their own stock in order to boost EPS for Wall Street and drive their stock price higher. They borrowed $2 billion to buy back the stock. With $13.9 billion of debt, maybe their cash could have been used to pay it down rather than buying their overpriced stock. Their stock price is exactly where it was in 2010, and 20% below its 2013 high.
Guess who received a huge chunk of the shares bought back? That’s right. Top management received massive multi-million dollar compensation packages in stock. It was in their best interest to drive the stock price higher. Maybe that is why they didn’t invest in information technology security. The unprecedented breach and loss of millions of credit card data to criminals has destroyed their credibility as a retailer.
The chickens came home to roost today. Their profit plunged by $377 million to a pitiful $234 million. For comparison purposes, they made $686 million in the 2nd quarter of 2007. Their comparable store sales continue to stagnate. Comparable store sales were flat, but the number of customer transactions declined by 1.3%. Price increases of 3.0% offset the traffic decline. Nothing like a little non-existent inflation to help out.
Target is a disaster. Their expansion days are over. They haven’t admitted it yet, but they will be closing hundreds of stores as our consumer society runs out of money to buy their Chinese made crap.
Lowes is a few years behind Target in the downward spiral phase, but they are employing the exact same warped strategy. Their profit was up 10.4%, while comparable sales were up only 4.4%. They didn’t report their traffic counts, but you can assume they had the same price inflation as Target, so store traffic increases were probably in the range of 1% to 2%. They lowered their profit guidance, as the fake housing recovery is not boosting sales.
But, they are implementing the Target strategy of buying back their stock to boost EPS. Their reported EPS was up 18%, as they bought back $1.1 billion for the quarter and $2.0 billion for the first six months. Since 2009 these bozos have bought back $14.1 billion of their own stock, enriching their executives at the expense of employees and stockholders. And they didn’t do it with excess cash flow. They borrowed $5.6 billion to buy back that stock. Over this same time frame they only spent $3 billion on new stores.
The managements of the mega-retailers know the glory days are over. The American consumer is tapped out and Boomers will not be spending what they don’t have. The CEO’s have chosen to enrich themselves on the downside, rather than return cash to stockholders. This is now the American way. It has been aided and abetted by the Federal Reserve. The excessively low interest rates have allowed corporations to borrow and buy back their stock in order to boost their stock price. Actual profit growth not required. When “high yield” junk bonds issued by dodgy companies across the land yield less than 5%, you’ve got yourself a bond market bubble.
According to the Federal Reserve, corporate debt has risen 27% over the past five years to an all-time record of $9.6 trillion. Close to $2 trillion was used to buy back stock, with $500 billion used last year alone. These companies then turned around and issued $180 billion of the shares to top management. This is the circle of life at the top. Meanwhile real wages for the real workers continue to decline. The Fed has created another bubble in corporate stock buybacks, and it isn’t just retailers.
The iconic manufacturing giant Caterpillar just announced its 20th month in a row of negative year over year sales. If manufacturing hasn’t recovered and retail hasn’t recovered, what is left? The stock market is reaching new highs solely on the bubble blowing abilities of Ben and Janet.
Caterpillar has it all figured out. Increasing revenue and profits is old school. Investing in your business is for suckers. You can push your stock to all-time highs with new paradigm thinking. Just buy back $2.1 billion of your own stock and redistribute it back to your top executives. Then it will trickle down to the working class eventually.
I wonder if historians will look back on this period in U.S. history and wonder WTF were those idiots thinking. They will rightly wonder how a country could believe that layering trillions in debt upon trillions of debt, in order to consume our way to prosperity, while waging endless wars, making entitlement promises that couldn’t possibly be kept, and funneling the vast majority of the nation’s wealth to .1% of the population, would possibly end well.
This dying, warped, delusional empire is a wonder to behold. We surely won’t go out with a whimper.