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The specter of rising rates will loom large as investors listen to


(WMT) - Get Walmart Inc. Report



(TGT) - Get Target Corporation Report



(KSS) - Get Kohl's Corporation Report

tell their stories Thursday.

Much will turn on guidance when the discount trio release first-quarter results, all of which should show gains from a year ago. After a lackluster April, however, investors will want clues about the rest of 2004, particularly whether an expected tightening by the

Federal Reserve

will put a damper on the buying habits of price-conscious consumers.

Bernstein analyst Emme Kozloff is expecting Wal-Mart and Target to sound cautious, "given recent top-line trends and no sign of cost abatement." She expects both companies to report first-quarter results that at least match the consensus, however.

Analysts are expecting earnings of 49 cents a share at Wal-Mart, up from the prior year's 42 cents a share. Wal-Mart itself has forecast earnings of 48 cents to 50 cents a share. Meanwhile, Wall Street is expecting Target to earn 47 cents a share, up from 39 cents a share a year ago. There is a slight chance of downside results at Target, though analysts think it unlikely. The company said last month that profit should exceed the then-consensus earnings estimate for 45 cents a share. Both companies report before the bell.

The reports should shed light on what has become a key battlefield for the two companies: their flagship stores. At Wal-Mart, sales momentum has recently shifted toward the wholesale division, Sam's Club. In the fourth quarter, for example, operating profit at the Wal-Mart stores division rose 8.3% to $3.88 billion, while operating profit at Sam's Club jumped 17.1% to $343 million.

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For April, Wal-Mart's flagship operation had a same-store sales increase of 3.8%, while Sam's Club saw comps grow 8.3%. Target saw its April same-store sales on plan, with flagship comps up 6.2% and overall same-store sales rising 4.9%.

A reason for the divergence could be that "the consumer is feeling better and willing to go upscale," said Davenport & Co. analyst David Campbell. Money is flowing more freely now that the economy is improving, and "for the time being, Target is benefiting from more discretionary spending," he said.

At Wal-Mart, operating expenses could limit earnings upside in the quarter,

as they did in the fourth quarter, Kozloff said. She estimates that general expenses as a percentage of sales rose 10 basis points to 18.11%, citing higher costs in insurance, transportation and utilities. Additionally, the company's poor management of labor expenses will probably pressure total expenses, Kozloff said.

Looking to the full year, Wal-Mart previously guided earnings to $2.34 to $2.38 a share. Kozloff expects a "cautiously optimistic" tone with upbeat comments on sales and margins, but neutral to downbeat assessments on expenses. She is calling for 2004 earnings of $2.38 a share. (Bernstein has not done investment banking for Wal-Mart in the past 12 months, but it has done banking for Target.)

Shares of Wal-Mart were dropping $1, or 1.8%, at $53.53 Wednesday ahead of its earnings report.

At Target, the biggest question mark for investors is who might bid on the company's underperforming Mervyn's and Marshall Field's department stores.

Federated Department Stores


said on April 15 that it is looking into buying the higher-end Marshall Field's chain, a move most analysts expected. Target had first said on March 10 that it planned to review alternatives for the two chains.

According to a

Women's Wear Daily

report, first bids were due May 10. Besides Federated, analysts have speculated that

May Department Stores


could be a solid match to acquire the 62 Marshall Field's stores. Another rumor is that

Selfridges & Co.



, upscale British department store chains, could also be interested. Marshall Field's is valued somewhere between $1.8 billion and $2.2 billion.

As for Mervyn's,

Women's Wear Daily

suggested Kohlberg Kravis Roberts & Co. and the Blackstone Group might want the 266-store chain. Some analysts also think Target could keep the Mervyn's locations, make some into Target stores and liquidate the rest -- or just liquidate them all. In that scenario, the chain could be worth around $1 billion.

Target itself lists the book value of both Mervyn's and Marshall Field's at around $1.8 billion each.

Unfortunately, details on Thursday from Target on the potential divestitures could be hard to come by, said Campbell. "I was surprised they announced they were going to look at selling

Marshall Field's and Mervyn's. They typically don't say much about what they're going to do," he said.

As for the quarter, Campbell sees Target's earnings at least meeting the consensus estimate, but he would not be shocked to see upside. "Retail sell-through was good for the first quarter, so it's likely the gross margins were strong," he said. (Davenport does not have an investment banking relationship with Target.)

Looking to full-year 2004, Target has said expectations for a profit of $2.27 a share are "reasonable." Analysts are expecting $2.31 a share. Campbell sees a measured outlook on Thursday.

"The company knows that it's a challenging marketplace, so I don't think they'll try to fool anybody," Campbell said..

Shares of Target were lately falling 50 cents, or 1.1%, to $43.79.

As for Kohl's, the company said on May 6 that it is still comfortable with its first-quarter earnings estimate of 32 cents to 34 cents a share; the consensus is for 33 cents a share. Total sales in the first quarter were up 12.4% year over year to $2.38 billion, while quarterly same-store sales decreased 0.1%. Kohl's had initially forecast a 2% to 4% increase in first-quarter same-store sales.

Kohl's focus in the quarter was inventory management and merchandising -- problems that also plagued the company in 2003. Investors will be looking for a detailed update in its late afternoon earnings call.

Analysts expect earnings of $2.12 a share in the full-year, which would compare with $1.69 a share in full-year 2003. Shares of Kohl's were down 64 cents, or 1.5%, at $41.88 in Wednesday's session.