Target in My Sights

OK, so I've been positive on Big 2 discount retailer Target (NYSE: TGT  ) for a little while now and it's gone all of nowhere. But the closer this one gets to its 52-week low, the more interested I get. I don't often like to buy huge companies in highly competitive businesses, but at the right price I'll consider just about anything.

Results from Target certainly spooked the market Monday morning. Fortunately, overall sales were not the big problem: Total revenue rose more than 12%, with comp-store sales up 5.1%. Sales were strong in categories like children's apparel and consumer staples, while home-oriented sales were reportedly disappointing -- only fair, I suppose, because I'm almost always disappointed whenever I go there looking for those items.

Going down the line, though, there were some items that seemed to bug folks a little more. The gross margin actually slipped a bit, and I think that's the first time that's happened since I started writing about this company. I think it's always worth noting that of the $110 million increase in pre-tax earnings, $60 million came from the credit card business and another $28 million came from an adjustment to depreciation and amortization. Net EBIT growth (earnings before interest and taxes) of about 2%, then, is not so compelling.

It seems that whenever there's the slightest hiccup at Target, the knee-jerk reaction is "Oh, my gosh, Wal-Mart (NYSE: WMT  ) is going after them." Yeah, well, maybe. And maybe not. Believe me, I wouldn't want to compete against Wal-Mart on a day-to-day basis, but I don't think one quarter proves that Target is slipping.

Longer-term, Wal-Mart might talk about going more upscale, but I'm not sure it'll succeed. In the meantime, Target is a very credible option to mall-based department stores like Sears Holdings (Nasdaq: SHLD  ) or Dillard's (NYSE: DDS  ) .

I can understand the idea of staying away from Target because of overall fears about the health of the U.S. consumer. That's not to say that I agree, but I at least can see the point there. In any case, these shares are getting more than a little interesting. A few more points on the downside and I just might add these to my own shopping cart.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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