Target Sells Off Despite Solid Quarter - TheStreet

Updated from 12:14 P.M. EDT


(TGT) - Get Report

beat Wall Street's expectations for the first quarter Tuesday, but the stock sold off anyway.

The discounter, which has gained fans among Wall Streeters and consumers for making bargain-shopping cool, had a solid quarter and blessed analysts' projections for the rest of the year. But the company's rich valuation had many investors hoping the company would boost its financial outlook.

The stock closed off $1.16, or 2.72%, to $41.54.

Target reported earnings of $345 million, or 38 cents a share, up 36% from $254 million, or 28 cents a share, in last year's first quarter. This was 2 cents better than the consensus estimate, according to Thomson Financial/First Call. Sales came in at $9.6 billion, up from $8.3 billion in the year-ago period and better than analysts had been projecting.

The Minneapolis-based company, which operates the Target, Marshall Field's and Mervyn's chains, said revenue from the company's closely watched credit business was $115 million, up from $110 million last year. In the conference call, the company said that much of the company's profit growth came from retail sales, rather than credit. This was particularly pleasing to many analysts, as most who follow the retail industry prefer to see growth coming from selling merchandise. A rapidly expanding credit business tends to raise worries about delinquencies.

"Overall, it was a great earnings quarter," says Jeff Stinson of Midwest Research. "There has been a lot of investor concern about credit, but today underscores the fact there is a terrific retail business." (Stinson has a buy rating on the stock and his firm does not have an investment banking business.)

Still, the company trades at a pricey 21 times next year's estimated earnings -- compared with projections of 15% annual earnings growth. The valuation has some people worried about how much the stock can appreciate.

For example, Eric Beder of Ladenburg Thalman has a market perform rating on the stock, writing in a recent report that the "valuation of Target reflects investor demand for further significant earnings-per-share upside, which we believe will become more difficult as the year progresses." (His firm does not have a banking relationship with Target.)

While Target executives were hesitant to predict that struggles at bankrupt



would pay off in market share gains for Target, some analysts see that discounter's troubles as a potential boon.

"Valuation isn't really a concern," says Stinson. "With the downfall of Kmart, I do think there is some benefit to Target over the next couple of years."

But judging by Tuesday's selloff, it is certainly a concern weighing on investors' minds.