STOCK WATCH


Target Misses Its Target

Disappointing quarterly earnings sent shares of the second-largest discount retailer reeling. The stock could be a bargain at this price.



What’s a penny worth? Even for the most diehard bargain shoppers at Target (symbol TGT), a penny doesn’t count for much nowadays. But miss Wall Street’s earnings-per-share estimates by a penny, as Target did on Monday, and investors storm out in disgust. Target’s stock slid by more than 4% Monday to close at $50.

The selloff came because Target reported quarterly earnings of 63 cents a share. While earnings rose 12% over the same period a year ago and totaled $554 million, that was 1 cent less than the average brokerage analyst had predicted, according to Thomson First Call. The morning selling sent shares plummeting more than 7%. They recovered a bit after Doug Scovanner, chief financial officer of the Minneapolis-based chain, said Target could still earn $3.11 per share for the entire fiscal year that ends next January. That, not coincidentally, is what analysts are forecasting.

Target has built an enviable spot for itself in discount retailing. While Wal-Mart’s sales are six times higher, number-two Target’s revenues and earnings are growing more rapidly. Target manages to charge rock-bottom prices while still attracting higher-end consumers to its 1,172 discount stores and 136 SuperTarget stores, which are much larger than the standard outlet. It also boasts a growing credit card business.

The culprits in Monday's report: Disappointing sales in home furnishings and higher costs. Company officials said the higher costs came because Target remodeled more stores than usual during the quarter.

Advertisement

Bank of America analyst David Strasser says the second quarter “could be tough as well. Recent store visits lead us to believe that despite overall inventory being in solid shape, there is oversupply of large spring seasonal apparel in stores, driving early season markdowns.” Merrill Lynch analyst Virginia Genereux downgraded the stock to neutral because she fears profit margins could shrink because of higher wages and energy costs. Strasser, on the other hand, continues to call the stock a buy.

Strasser may be closer to being on target. The stock sells at 16 times estimated this fiscal year's estimated profits and 14 times projected earnings of $3.57 per share for the fiscal year that ends January 2008. True, Target may miss earnings again next quarter. But given its history of generally delivering double-digit earnings and sales growth, the well-run chain could well be a bargain at this price. Analysts are forecasting earnings growth of 15% over the next three-to-five years.

Goldman Sachs analyst Adrianne Shapira likes the stock here. First quarter results were disappointing, she says, but adds: “This does not derail our long-term view, and we would view stock weakness as a compelling entry point for a best-in-class retailer growing earnings in mid-teens, selling at a compelling valuation.”

--Steven Goldberg



Get Stock Watch by e-mail for FREE. Registered users on Kiplinger.com can sign up to receive more than 20 valuable updates. Register Now »


More Sponsored Links


Advertisement

Market Update

Advertisement

Featured Videos From Kiplinger