Don't Bet on Target to Outperform

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following three consecutive days of losses, stocks are higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.46% and 0.44%, respectively, at 10:15 a.m. EST.

Yesterday, retail sales data for October showed an 0.4% rise -- the best such figure in three months, and higher than median economists' forecast of 0.1% in a Bloomberg survey. That figure suggests last month's government shutdown did not discourage shoppers from opening their wallets to any significant degree. Nevertheless, data points from Target (NYSE: TGT  ) this morning indicate the consumer is hardly opening that wallet with reckless abandon.

The Minnesota-based general retailer reported fiscal third-quarter results for the period ended Nov. 2, joining Sears Holdings, which announced this morning, as the last major retailers to issue earnings statements. Target's said earnings per share of $0.54 fell significantly short Wall Street's consensus estimate of $0.63, due to "higher than expected dilution of (29) cents related to the Canadian segment." For fun, let's translate that into English slang: We lost hella money on the Canadian business we are building -- more than we expected. That's right folks, for "dilution," simply read "loss."

If we zero in on Target's performance in the U.S., its "adjusted" EPS, which excludes Canadian operations and some legitimate one-time items, came in at $0.84, in line with the $0.80-$0.90 guidance range it had provided in in August. However, U.S. same-store sales grew just 0.9% year on year; that's certainly better than the 0.3% decline at Wal-Mart (NYSE: WMT  ) U.S. stores over the same period, but it's at the low end of Target's guidance and it highlights the challenge general retailers face gaining traction. U.S. gross domestic product grew at an average rate of 1.6% over the same period, so both Target and Wal-Mart are lagging the economy.

At 15.3 times next 12 months' earnings-per-share estimate, Target shares are valued at roughly the same multiple as the S&P 500. That suggests they are an acceptable buy, but it's difficult to drum up much enthusiasm for the idea. If you're picking stocks, your goal is outperformance, and Target shares don't look like a great candidate in that regard. Furthermore, investors can expect retailers to face a difficult environment for at least the next several quarters.

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