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Target: The Discount Dichotomy

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It may be a good time for discounts as consumer confidence hits a new low, but that's not translating into impressive quarterly results for Target (NYSE: TGT  ) . Apparently, in the current brutal retail environment, the company's "cheap chic" isn't cheap enough.

Target's fourth-quarter net income fell 41% to $609 million, or $0.81 per share. Revenue fell 1.6% to $19 billion, and same-store sales declined a dismal 5.9%. Gross margin fell 1.4% as the company increased markdowns and the sales rate of nondiscretionary, lower-priced items increased.

Remember the bubbly days of consumer spending, when Target's credit card segment was a bright spot? Now, like many things associated with the debt-driven excesses of that period, the credit card segment is an ugly drag. It booked a $135 million pre-tax loss in the quarter, compared to a $189 million profit this time last year. The company also added $245 million to its allowance for doubtful accounts.

Traditionally, Target has been one of my favorite retail stocks, but now I'm a bit leery, just as I was last quarter. For whatever reason, Target is not weathering the economic storm as well as one might have thought it could. It's up against tough comparisons after several years of strong performance, and it seems to me that consumers now view discount rivals as the real purveyors of rock-bottom deals. Also, Target's struggling credit card segment adds a negative twist on the whole story.

So on one hand, I prefer the idea of investing in Costco (Nasdaq: COST  ) or Wal-Mart (NYSE: WMT  ) , both of which seem to be weathering the storms battering retail better than Target. On the other, Target is trading at a far cheaper multiple than either of the other two big discount retailers. Target is coming in at 10 times earnings, while Costco is trading at 14 times earnings, and Wal-Mart at 15 times earnings.

Target's malaise has made it a cheaper stock, and it's not one of those retailers I fear faces possible doom in our current downturn. However, in these troubled times, I think investors would do well to seek out the strongest retail contenders with lots of cash and little debt. At the moment, Target is falling a bit short in my book.

Shop around for some related Foolishness:

Wal-Mart Stores and Costco Wholesale are Motley Fool Inside Value picks. Costco Wholesale is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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Related Tickers

10/20/2016 4:00 PM
TGT $67.71 Down +0.00 +0.00%
Target CAPS Rating: ***
COST $150.04 Down +0.00 +0.00%
Costco Wholesale CAPS Rating: ****
WMT $68.73 Down +0.00 +0.00%
Wal-Mart Stores CAPS Rating: ***