TGT Preview: Piling On?

After the horrible October comps reported on Nov. 6 and the horrible retail comp report today, can Target (TGT - commentary - Cramer's Take) management say anything more to dampen holiday spirits? Perhaps, but things are so ugly now in retail that when Target reports its third-quarter results on Monday, investors may breathe a sigh of relief if the company simply doesn't pile on the pain.

Analysts are looking for 49 cents of EPS on $15.2 billion in sales. The quarterly comp will be bad; each month was disappointing, especially October when Target reported that its comp was down 4.8% vs. an expectation of it being down 2.1%.

Although Target is an erstwhile discounter, which should generally benefit in a tougher economic environment, the company's success in developing the upscale "cheap chic" concept is now hurting it, as customers trade down to the true "cheap cheap" as represented by Wal-Mart (WMT - commentary - Cramer's Take). On the call, analysts will question how quickly Target can de-upscale itself, if necessary.

Of course, over time Target could be a preferred alternative for former luxury shoppers, who might be trading down from a Nordstrom (JWN - commentary - Cramer's Take), for example. Management's view of the opportunities should be interesting. Management will need to discuss the sustainability in categories that are still comping positively, such as health care, food (which, of course, are non-discretionary) and jewelry.

Analysts will also probe for problems at the credit card operation, which added nicely to incremental profit in the good years but could be an albatross now. Bad debt expense has been creeping up as the economy creeps downward, and analysts expect 12% charge-offs in 2009. Total credit outstanding should grow a couple percentage points, and investors will be interested in knowing the direction of finance charge rates, which appear to be hovering around 16%.

Of course, investors will also be interested in management's stance toward the proposed Pershing Square transaction. The proposal has its merits, but consequences such as a credit downgrade or timing of tax benefits need to be explored. The conversation should be lively.

The call starts at 10:30 a.m. EST.

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Know What You Own: Target operates in the discount variety store industry, and some of the other stocks in its field include Costco (COST - commentary - Cramer's Take), Family Dollar (FDO - commentary - Cramer's Take), Dollar Tree (DLTR - commentary - Cramer's Take) and BJ's Wholesale Club (BJ - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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At the time of publication, Dvorchak was long Wal-Mart, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.