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A Target for the Bears

Profitability was somewhat mixed at Target despite the 7.5% decline in operating income. Gross margins advanced by 50 basis points to 30.7%, while adjustments to vendor agreements contributed (in part) to a 20 basis-point improvement of that total.

Adjusted earnings per share looked worse than it really was -- falling 5% to $1.05 per share, which was below the company's target. But one-time items such as an early debt retirement absorbed 41 cents per share during the quarter.

The company's CEO Gregg Steinhafel was pleased with the performance. He said:

"Target's first-quarter earnings were below expectations as a result of softer-than-expected sales, particularly in apparel and other seasonable and weather-sensitive categories. While we are disappointing in our first-quarter performance, we remain confident in our strategy, and we continue to invest in initiatives, including Canada, our digital channels and CityTarget, that will drive Target's long-term growth."

Those were certainly encouraging words, but management still cut Target's full-year fiscal 2013 outlook. The company is now projecting earnings between $4.70 and $4.90 per share, down from its prior EPS guidance of $4.85 to $5.05. Management does not seem confident that comps will get back up at any point this year.

Analysts responded by issuing "sell" recommendations on the stock. But I wouldn't overreact here just yet. As with the struggles that are affecting Lowe's, I still see long-term success here for Target especially given the fact that we're still in an economic climate that has yet to fully recover. The fact that management has margins trending in the right direction is also a positive sign.

That said, management's main challenge is, among many, is to figure out ways to restore growth and position the company to compete for effectively not only against Wal-Mart, but also against the likes of Costco (COST) and Kohl's (KSS).

I believe shares of Target are fairly priced today. That's not to be interpreted as a bad thing. But to the extent that Canadian store expansion and the company's CityTarget initiative can post "decent" growth numbers while also expanding margins, I believe patient investors will be rewarded.

That's a tall task. Investors should not expect these improvements to happen overnight. But I believe the company has the management in place to do it.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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