TGT Preview: Many Obstacles Blocking the Path

At $51, Target (TGT Quote - Cramer on TGT - Stock Picks) stock discounts a 9% five-year EPS growth rate, using consensus EPS estimates of $3.42 and $3.87 for this year and next, respectively. The sell-side median price target is $53. At some point, as this consumer retrenchment wears on, investors could probably discount increased sales and earnings from the closing of a big number of Kmart stores, but that is too far off now, I think. Mervyns closures in California will be a moderate positive as well, but most of the other announced closures lately have no bearing on Target because the discount segment was consolidated prior to the last recession.

So, unless gas prices go to the $3 area with the expectation of some stability, it is hard to come up with a reasonable expectation that Target's EPS growth rate will reach too much over 10%. The 3% to 5% lower comp-store sales number that Target is putting up vs. Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks) domestically does not look like it will change soon. Target's higher-margined home and apparel offerings are still under pressure from the now frugal consumer. As long as that comp differential with Wal-Mart exists, there runs the risk that Wal-Mart's improved apparel and home offerings will be discovered by more consumers with some attendant loss of market share for Target.

At the same time, year-to-date comps around zero are not going to lever the cost base. But realistically, the 7.7% to 8.5% earnings before interest and taxes margin area of 2004 to 2008 should be considered to be above normal, and you had to figure that it would come down one away or another. (Calendar 2002 and 2003, recession years but not consumer-led recession years, were 7.5%.)

Management's increase in credit card loss expectation in the first quarter from 7% to the 7% to 8% area and now the 9.6% charge-off rate for the Target Master Trust in June point to credit being a future depressant to company sales, forgetting whether or not you are worried about credit losses. And the recent credit card terms revisions look to be a vehicle to increase revenue to fight loss costs; it is certainly not a sales-friendly type of move.

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