TGT Must Compete Down

For Dvorchak's preview heading into the Target conference call, please click here.

Perhaps apropos to this murky period in the economy, Target (TGT - commentary - Cramer's Take) management was unable to shed much light on the fate of retail for this coming holiday shopping season. The company reported essentially in-line results of 49 cents EPS on $15.11 billion in sales, but no surprises were anticipated since the October comps were reported last week.

Management tried not to sound a panicked tone, but clearly, the company is concerned enough about husbanding cash to eliminate the dividend and cut back the capex plan by $1 billion. Target expects a November comp of down 6% to down 9% -- ugly indeed -- and management reiterated that a point estimate is very difficult due to the weird calendar (extra week in the quarter), tough comps last year and of course the economy. Management had to admit that the first half of November has been horrid, but the company is not yet ready to write off the month. The current trend indicates fourth-quarter EPS coming in at 90 cents to $1.00, however, as compared to the $1.22 estimate.

Sales levels right now are the single biggest variable in determining where EPS comes out. Everything else -- better sourcing, expense savings and gross-margin trends -- pales in comparison. Management is bullish on sustaining gross margins, noting that the company is pulling 100 basis points out of factors other than mix, which is pressuring margins as customers trade down. Some are serendipitous, such as the timing of workers' compensation payments, but others are more purposeful, such as inventory control. Another thing that management had to admit was that this quarter's purchasing was done with expectations of a stronger fourth quarter, so much of the inventory tightness will not show up in the numbers until the first half of next year.

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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.