A Not-So-Moving Target

• Email
• Share
• Print

Remember when Target's (NYSE: TGT) credit card segment used to bolster its quarters? Now the segment looks like a drag, which shouldn't be too shocking in the current economic climate: Many consumers are suffering in the housing bust and have way too much debt to boot.

Target's second-quarter net income fell 7.6% to $634 million, or $0.82 per share. Sales increased by 5.7% to $15 billion, and same-store sales dropped by 0.4%.

The credit card unit helped drag Target down, despite the fact that the average receivables directly funded by Target in the second quarter fell by 19.8%, reflecting the investment JP Morgan Chase (NYSE: JPM) made in the receivables portfolio last year. Still, profitability in the segment fell by 65% to $74 million in the quarter, with higher bad debt expense and lower interest rates contributing to the decline in yield.

Meanwhile, Target's own interest expense became more pronounced, increasing by $63 million due to higher debt balances that Target used for capital investment, share repurchases, and the receivables portfolio.

For the most part, I've been pretty bullish on Target stock over the years, preferring its strategy, brand, and potential for growth to discount-rival Wal-Mart (NYSE: WMT). However, last November I felt uncomfortable with its increasing debt load, particularly since it used debt to fund share repurchases. I guess I was on the right track, seeing how interest expenses are burdensome when business weakens.

Target has been bucking the trend in a negative way here lately; many low-price retailers have found themselves in their sweet spot in the current climate, with Wal-Mart, Costco (Nasdaq: COST), and McDonald's (NYSE: MCD) all being beneficiaries of consumers' current frugality.

Consumers are more interested in cheap food and other necessities as budgets become increasingly constrained, and Target's previous renown for cheap, chic, discretionary apparel and home furnishings is a bit of an Achilles' heel at the moment.

Then again, some retailers are still racing ahead, despite the poor economy -- consider Urban Outfitters (Nasdaq: URBN) and American Apparel (NYSE: APP), both of which reported some impressive growth in their quarterly results last week.

Target faces near-term challenges, and so, I don't think there's any huge rush to buy in with any sense of urgency. However, given Target's many strengths, I think investors should keep the stock on their watch lists, at the very least; I still think it's compelling for those with long-term horizons.

Shop around for some related Foolishness:

• Last week, it was time to wonder whether to put Wal-Mart on pause.
• Inflation hurts Costco, too.
• Last November, Target had wild aim.