Target Expresses Cautious Confidence About the Second Half

The much-ballyhooed second-half recovery that Wall Street has come to expect is looking less likely for many of the nation's retailers.

Target (TGT Quote - Cramer on TGT - Stock Picks), the discount retailer that made bargain shopping cool, raised the possibility that its earnings could fall short of expectations for the remainder of the year in a conference call Tuesday to discuss the company's fiscal first-quarter earnings.

While executives stopped short of lowering guidance, their comments were clearly cautious on the direction of the economy and were another sign that an economic recovery in the second half of 2001, which analysts and investors have been trumpeting for months, is hardly a sure thing.

"I've heard fewer and fewer people talk about a second-half recovery in the retail sector lately," says Jeff Stinson, an analyst at Midwest Research. "The environment we see in the first half may be the environment we see through the second half.

"I think you have to remember that we are talking about a retail environment that is still pretty slippery." (Stinson rates Target a buy.)

Shares in the Minneapolis-based company were up recently $1.25 at $39.

The comments from Target, the nation's fourth-largest retailer, followed by a week similarly cautious comments from Home Depot (HD Quote - Cramer on HD - Stock Picks) and, somewhat less so, Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks). Target's outlook came as the company reported earnings for the first quarter ended May 5 of 28 cents a share, up two cents a share from last year's first quarter and in line with Wall Street's expectations. Its revenue for the quarter rose 7.7% to $8.35 billion, also in line with the consensus estimate compiled by Thomson Financial/First Call.

In the fiscal second quarter, analysts expect the company will earn 30 cents a share and for the full year, $1.55 a share. The company is likely to hit these targets, said Douglas Scovanner, Target's chief financial officer, in the conference call. But he hedged his bet: "In a more difficult environment, we could fall short of these estimates."

The company said it expects key same-store sales, which measure activity in shops open at least a year and are an important metric for judging the health of retailers, to grow in the mid-single digits on a percentage basis for the remainder of the year, lower than the mid- to high-single-digit growth the company has historically enjoyed.

In April, same-store sales rose a paltry 1%, and were below plans for the second week of May. In April, same-store sales came in much better relative to expectations at many of the nation's retailers, but were still dismal compared to a year ago.

"The business continues to look tough" at Target, says Dan Binder, an analyst at Buckingham Research. Binder rates the stock a neutral because he believes it's expensive at its current multiple of about 27 times trailing earnings. (His firm doesn't do underwriting.)