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Take Aim at Target

The retailer is stellar, but there are issues to monitor.

I like

Target

(TGT) - Get Target Corporation Report

. I like the store, the company and the stock. But so does everyone else, and that makes me nervous.

Eighteen of 23 sell-side analysts rate Target a buy. None recommend selling it.

Of course, there aren't many reasons to take a negative stance on the retailer. Margins are increasing, sales and earnings are forecast to grow about 12% this year and the company's plans have been executed like a Texas felon -- especially in comparison to rival

Wal-Mart

(WMT) - Get Walmart Inc. Report

.

So assuming that when Target reports earnings Wednesday it matches or exceeds Wall Street estimates, that company's executives may want to wear flack jackets to protect themselves from all the back slapping that likely will take place on the conference call.

That doesn't necessarily mean the stock will jump. Investors have come to expect good news from Target, so the company will have to have really unexpected positive news for a big bump. But I suspect all will be copasetic and investors generally will be happy.

But not me. I'll be looking for something to be concerned about.

Before you Target bulls fire off angry emails, let me make clear that I'm not searching for a reason to be bearish. I'm not in cahoots with the shorts, or short the stock myself (per TSC's employee policy). I do, however, thrive on finding issues that investors should be alerted to, as I did

recently with

Under Armour

(UA) - Get Under Armour, Inc. Class C Report

and

last year with

St. Joe

TheStreet Recommends

(JOE) - Get St. Joe Company Report

.

Margin, Credit Watch

According to Thomson Financial, Target is expected to post earnings of 71 cents a share for the first quarter, with revenue of $14.2 billion.

I'll be keeping a close eye on Target's inventory and margins. Wal-Mart has been having trouble moving merchandise, particularly in apparel and home goods. I want to see if Target has similar issues, which could be reflected in higher inventory or lower margins due to markdowns.

Target has already said that it doesn't expect much improvement in gross margins as low-margin groceries make up a greater portion of the sales mix. Analysts expect gross margin to come in at 32.7%, a 53-basis-point improvement over the first quarter of last year. I think that figure may be a bit ambitious.

There shouldn't be any major surprises with Target's sales forecast. The company's April same-store sales decline of 6.1% was in line with expectations. Late Monday, Target reiterated that it expects May same-store sales growth of 5% to 7%.

I'll also be examining the company's credit card business. This high-margin segment has provided a nice boost to earnings over the past couple of years.

But it's a fine line to walk. While the business has been a big help to the bottom line, I don't want to see Target turn into a credit card company and incur all of the risks that are associated with that enterprise.

At the end of fiscal 2006, Target's allowance for doubtful accounts climbed to 7.7% of receivables, up from 7.4% a year earlier, although net write-offs fell to 5.1% from 7.2%. A further rise in allowance for doubtful accounts or net write-offs may be a warning sign, especially amid all of Wall Street's dire predictions about consumer spending.

On Monday, the House of Representatives passed legislation banning retail companies from establishing industrial loan companies, which are federally insured financial institutions that can offer loans or credit cards. Wal-Mart had

sought to set up an ILC, a move that was fought hard by banking and consumer groups.

Target's credit card business operates through its own ILC. The bill would grandfather ILCs created before 2003, as is the case with Target. A spokeswoman from Target declined to comment on the legislation, but I hope the subject will be addressed on the conference call.

Lastly, I don't expect Wal-Mart's

problems to bleed into Target's results. In reporting weak results, Wal-Mart didn't blame weather, a weaker consumer or other macro issues. Its problems in the first quarter were its own, and Target will be a better gauge of the health of the consumer.

Target's earnings call may well be stellar, and those 18 analysts will have their faith in the company rewarded. But I'll be looking for any signs that Target has missed the mark, so check back for my recap.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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