If Target (NYSE:TGT) isn't careful, Wal-Mart (NYSE:WMT) could take the shirt right off its back. The country's second-largest retailer, and owner of Target stores, Marshall Field's, and Mervyn's, reported second-quarter results that left investors cold. Sales at Target locations open more than one year rose just 1.5% year over year, less than half Wal-Mart's recent 3.2% same-store sales gain.

While Target has been a noted clothing retailer for years, Wal-Mart only recently entered the fray with threads and brand names (including Levi's) that are strong enough to swipe business from the likes of Target, and swipe they are. Tough competition and declining department store prices unraveled Target's second-quarter results just enough to disappoint investors.

Net income rang in at $358 million ($0.39 per share), up 4% from last year's $344 million ($0.38 per share). Target's income all but treaded water even as total sales climbed 9% to $10.9 billion, bolstered by an 11% revenue gain at the Target chain. New store openings and Target's growing credit card business accounted for a bulk of the increase.

Meanwhile, the Marshall Field's and Mervyn's department store chains did anything but help. Sales declined 3.4% and 7.3%, respectively, at Target's two higher-priced retailers.

Looking closer at the numbers, Target continues to manage inventory well, but its cash balance remains in decline, down to $430 million from $1.7 billion a year ago, while long-term debt is mounting, now topping $11 billion. The company rarely achieves free cash flow, and when it does it's slight, so it's financing much of its growth from the balance sheet rather than the cash flow statement.

Management is comfortable with consenus 2003 earnings estimates of $2.01 per share. Target's $39 stock, which is up 30% this year, trades at 19.4 times that forward estimate. At this price, there's no discount for stock shoppers here.

Did you know that Wal-Mart was the best-performing stock of America's 20 most popular stocks in the last five years?