Target Doesn't Miss

Nothing exciting or dreadful came out of Target's (NYSE: TGT  ) second-quarter earnings today. Given the recent macroeconomic nervousness, and fears about how consumers would respond, that's probably as good as it gets.

The discount retailer reported net income up 13% at $686 million, or $0.80 per share. Revenues increased 9.5% to $14.6 billion, helped along by a 4.9% increase in same-store sales, new store expansion, and of course, its credit card operations, which are often given credit (pun intended) for helping bring about impressive earnings. Operating income increased by 11.8% to $1.2 billion.

Target met quarterly expectations, and also said that the expectation for earnings of $3.60 per share for the year is "within the range of likely outcomes." I guess given the current climate and nervousness about near-term consumer spending, that could be interpreted as good news, even if it sounds a bit wishy-washy.

The credit card business at Target is an interesting factor. William Ackman's Pershing Capital Management recently took a stake in Target, believing shares to be undervalued, and many have speculated that Ackman plans to agitate for the company to sell off its credit card business. Pershing Capital is well known for pushing for increased shareholder value; one of its well-known moments was when it pressured Wendy's (NYSE: WEN  ) into spinning off Tim Hortons (NYSE: THI  ) .

Target's credit card business represented $163 million in earnings before taxes for the quarter, a 34% increase on a year-over-year basis.   

Nobody's forgotten the fact that discount rival Wal-Mart (NYSE: WMT  ) may have reported a decent quarter recently but disappointed investors with its outlook -- it appears it is going to take longer to turn things around than investors would have hoped. In addition, nobody's forgotten that Target customers tend to be more comfortable financially than the typical Wal-Mart customers, which of course gives a good argument as to why Target might weather an economic storm better. It seems sensible for investors to gravitate toward retailers that aren't in the midst of trying to turn around, like Wal-Mart or Gap (NYSE: GPS  ) , but stick with the ones that are firing on all cylinders and aiming for more resilient demographics.  

Target's currently trading at 14 times forward earnings -- about on par with its anticipated fiscal 2008 earnings growth rate -- and while that doesn't sound exactly cheap (not outrageous, either), it's got a lot to like for the long term, and not least of which is the fact that it's got a good brand, a great eye for merchandise, and the discount strategy that can hold up even in difficult times. In the retail universe, I'd say investors wouldn't be irrational to take aim for Target.   

Wal-Mart and Gap are Motley Fool Inside Value recommendations. To find out what other companies Philip Durell has recommended as bargain picks, take a 30-day free trial. Gap is also a Motley Fool Stock Advisor pick.  

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


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