On August 16, 2023, Target reported second-quarter diluted EPS of $1.80, up from $0.39 a year earlier. In the same earnings release, it cut its full-year earnings forecast.
Profit per share rose. The full-year outlook fell.
The quarterly result tells you what happened. The full-year forecast includes both the months already finished and those still ahead. Better than last year and better than previously expected are different comparisons.
What management is forecasting
Earnings guidance is management's forecast for profit over a stated period. Broader guidance can cover sales, margins or capital spending. Some companies give numbers; others offer only a broad outlook or no guidance.
The speaker matters. Guidance comes from management; analyst consensus combines outside analysts' estimates. The two can disagree about the same business.
A long-term ambition describes what management wants to achieve. Guidance tells you what it expects to happen within the forecast period.
Before judging a revision, check four things:
- Metric. Revenue, EPS, margin and capital spending measure different things. A higher sales forecast can coexist with a lower profit forecast.
- Period. Match the fiscal quarter or year. A forecast for the remaining months covers less than one for the full year.
- Accounting basis. Compare GAAP with GAAP, or adjusted earnings with the same adjustments. Match basic or diluted EPS too.
- Assumptions. Look for management's stated expectations about demand, prices, costs and currencies.
A bigger number can simply reflect a different definition of profit. Switching from GAAP to adjusted EPS is not, by itself, a guidance raise.
Under US securities rules, earnings forecasts are voluntary. Declining to give one, by itself, tells you little about a company's trustworthiness.
Read both ends of the range
Target's August release replaced its fiscal 2023 diluted GAAP EPS range of $7.75–$8.75 with $7.00–$8.00. Its adjusted EPS ranges were identical and changed too. The comparison here uses GAAP throughout.
Before calculating anything, would you call that a raise, maintained guidance or a cut?
It's a guidance cut. Both endpoints fell by $0.75 per share. Overlapping ranges can still tell a clear story: management lowered both the bottom and the top of its outlook.
The guidance midpoint is the average of the endpoints:
For the old range, ($7.75 + $8.75) ÷ 2 = $8.25. For the new one, ($7.00 + $8.00) ÷ 2 = $7.50.
The midpoint fell by $0.75: $0.75 ÷ $8.25 × 100 = about 9.1%. Both bars remain $1 wide; the whole range shifted down.
A midpoint is a convenient summary. Averaging two endpoints doesn't make the middle the most likely outcome or tell you the odds of landing inside the range.
A range can also widen without its midpoint moving. Lowering the bottom and raising the top by equal amounts leaves the center unchanged, but allows for both weaker and stronger results. The midpoint alone would hide that change.
A raise can still disappoint
A guidance raise lifts management's forecast above its previous one. Maintaining guidance leaves it unchanged; a cut lowers it. These labels compare management with its earlier forecast.
Say a company raises its annual EPS forecast from $4 to $5. Analyst consensus already stands at $6 for the same year and accounting basis. The company has raised its own bar without reaching the analysts' bar.
That's why a raise can still disappoint. As with beats and misses, the benchmark changes the answer. Guidance can move a stock by changing the future investors are valuing; the reaction also depends on expectations and the other news in the release.
Test the assumptions
Target credited lower costs from markdowns and other inventory issues for part of its quarterly profit recovery. Markdowns are price cuts to clear merchandise. Weaker sales trends prompted the lower annual outlook. Costs and sales were pulling in opposite directions.
The assumptions can change even when the range stays put. A company might expect weaker demand but also lower costs that offset the damage. An unchanged EPS forecast would then hide a different business outlook.
Compare the reasons management discloses with its earlier statement. A useful forecast gives you assumptions to test; a changed range without an explanation leaves you a question for management.
Sandbagging means deliberately making a forecast easy to beat. Repeated beats alone cannot establish intent: cautious planning, uncertainty or an improving business can produce the same pattern.
Guidance withdrawal means management takes back its earlier forecast. The old range no longer represents its view. You lose a numerical anchor; the explanation may point to weaker business, greater uncertainty or both. Withdrawal alone doesn't establish how the business will perform.
On the earnings call, listen for which assumption changed and whether management actually explains it.
In short
- Guidance is management's outlook, not analyst consensus or a guarantee.
- Compare the same metric, fiscal period and accounting basis in the old and new forecasts.
- Read both endpoints: the midpoint can stay still while the range changes.
- A raise from management's old forecast can still fall short of analysts' expectations.
- A higher annual forecast can reflect past success with no improvement in the months ahead.