TGT Preview: Hope After Wal-Mart?

The retail parade continues Tuesday morning, when Target (TGT - commentary - Trade Now) reports, and all eyes will be on this discount segment bellwether after Wal-Mart's (WMT - commentary - Trade Now) discouraging commentary last week. The Street is looking for 50 cents in EPS on $15.2 billion in sales.

The company already reported preliminary third-quarter comps of down 1.6% (with October essentially flat at down 0.1%) and noted that traffic finally turned up in September and continued the trend in October. Back-to-school and apparel sales were encouraging, but Target is still seeing a lower average ticket as the consumer retrenches. Declining food prices remain a headwind. Management is telegraphing a flat comp for November, but analysts are likely to be very nervous given the traffic slowdown in the back half of October and the guide-downs from most other prominent retailers.

Margins are likely come in ahead of expectations, as Target has been less promotional. More apparel in the mix and lower transport costs will help as well, but more consumables in the mix are offsetting some of these gains. Beauty, health care and personal categories have been particularly strong. Similar to every retailer, Target should show some SG&A leverage as expense-control initiatives bite.

Analysts will focus on credit results, due to concerns about the health of consumer balance sheets. Credit revenue should be down on lower interest rates, but lower charge-offs and bad debt expense should keep investors happy. Analysts expect credit expense to be down over 10% on the year.

Looking to the longer term, investors will seek a progress report on the PFresh initiative to update the store format. Given the size of the chain, this is a huge multiyear undertaking, which should take three or more years to complete. Given the weaker retail environment, investors will want to know that capex plans are still in place for the 300-plus stores that should be remodeled this coming year.

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

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At the time of publication, Dvorchak was long Target, 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.