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Should Investors Stay On Target?
High-end retailers tend to suffer during times of economic slowdown. Washington-based Nordstrom's (NYSE:JWN), for example, reported a third quarter earnings drop of more than 50% from the same period last year. Ritzier stores are not the only ones struggling, as middle of the road players post increasingly dismal earnings results, including J.C. Penney (NYSE:JCP), which saw its profits decline more than 50% for the third quarter.
Moving down the retail hierarchy, discount retailers like Target (NYSE:TGT) are not immune to the drain on profits, either. On Monday, the Minneapolis-based chain disseminated third quarter earnings numbers that showed a 23% drop in profits to $369 million, down from $483 million during the same period last year.
Background Bits
Target was incorporated in 1902 and, over time, has grown into a formidable retail force with more than 1,600 stores in some 48 states. In addition, Target generates enviable revenue.
According to Yahoo Finance, the Street expects the company to generate more than $66 billion on its top line for the year. While Target's sales expectations are respectable, they pale in comparison to those of Wal-Mart (NYSE:WMT), which is expected to generate a monstrous $400 billion in sales this year. (For more on Street expectations and how they affect prices, read Analyst Forecasts Spell Disaster for Some Stocks.)
Target sells a range of products, including sporting goods, electronics, apparel and health and beauty items, at prices conducive to solid margin numbers. According to Yahoo Finance, Target's operating margin of 7.98% for the previous 12-month period exceeds those of Wal-Mart (5.83%) and Costco (Nasdaq:COST) (2.75%). While Target exhibits some rosy aspects, its third quarter numbers point to thorns, however.
Long-Term Bull's-Eye
Target may weather the current economic storm and ultimately thrive because of its strong points, like name recognition and proximity to large populations, which can play a big role in garnering foot traffic. In addition, Target's comparatively high margin allows it some flexibility that some other players do not enjoy. Furthermore, the company is still quite profitable. Target is expected to earn $3.26 per share in 2008 and, despite macroeconomic difficulties, the company is expected to earn $3.37 per share in 2009.
Finally, when investors start paying attention to P/E ratios again, the stock could be in for a run. Currently trading at about 9.7 times the estimate for the current year and at 9.4 times next year's estimate, the stock would be more fairly valued above $40, or at about 13 times the current year estimate. Further, Yahoo! Finance puts Target's expected growth at more than 13% clip per annum in the next five years.
Short-Term Target Practice
Target, like other retailers, faces concerns about the coming holiday season as well as the first quarter of 2009. A bah-humbug holiday shopping season could put pressure on Target stock. With shares trading near the 52-week low, some tax-loss selling could ensure in the weeks ahead, before the start of the new year. Until the overall macro cloud lifts, however, retail and institutional players most likely will not renew interest in the shares.
Bottom Line
Target has the potential to do well over the long haul, but it will likely face difficulties in early 2009. Therefore, it is probably better to wait before drawing the bow on this one.
(To learn more about stocks in this sector, read Analyzing Retail Stocks.)
Moving down the retail hierarchy, discount retailers like Target (NYSE:TGT) are not immune to the drain on profits, either. On Monday, the Minneapolis-based chain disseminated third quarter earnings numbers that showed a 23% drop in profits to $369 million, down from $483 million during the same period last year.
Background Bits
Target was incorporated in 1902 and, over time, has grown into a formidable retail force with more than 1,600 stores in some 48 states. In addition, Target generates enviable revenue.
According to Yahoo Finance, the Street expects the company to generate more than $66 billion on its top line for the year. While Target's sales expectations are respectable, they pale in comparison to those of Wal-Mart (NYSE:WMT), which is expected to generate a monstrous $400 billion in sales this year. (For more on Street expectations and how they affect prices, read Analyst Forecasts Spell Disaster for Some Stocks.)
Long-Term Bull's-Eye
Target may weather the current economic storm and ultimately thrive because of its strong points, like name recognition and proximity to large populations, which can play a big role in garnering foot traffic. In addition, Target's comparatively high margin allows it some flexibility that some other players do not enjoy. Furthermore, the company is still quite profitable. Target is expected to earn $3.26 per share in 2008 and, despite macroeconomic difficulties, the company is expected to earn $3.37 per share in 2009.
Finally, when investors start paying attention to P/E ratios again, the stock could be in for a run. Currently trading at about 9.7 times the estimate for the current year and at 9.4 times next year's estimate, the stock would be more fairly valued above $40, or at about 13 times the current year estimate. Further, Yahoo! Finance puts Target's expected growth at more than 13% clip per annum in the next five years.
Short-Term Target Practice
Target, like other retailers, faces concerns about the coming holiday season as well as the first quarter of 2009. A bah-humbug holiday shopping season could put pressure on Target stock. With shares trading near the 52-week low, some tax-loss selling could ensure in the weeks ahead, before the start of the new year. Until the overall macro cloud lifts, however, retail and institutional players most likely will not renew interest in the shares.
Bottom Line
Target has the potential to do well over the long haul, but it will likely face difficulties in early 2009. Therefore, it is probably better to wait before drawing the bow on this one.
(To learn more about stocks in this sector, read Analyzing Retail Stocks.)
by
Glenn Curtis
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.
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