Sellers Aim for Target

The discounter's sales guidance overshadows strong government data and Home Depot.
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The retail space saw a smorgasbord of seemingly bullish catalysts Tuesday, including strong economic data from the government and earnings beats from

Home Depot

(HD) - Get Report

and

J.C. Penney

(JCP) - Get Report

. Still, the general trend in share prices was lower, as

Target's

(TGT) - Get Report

soft sales guidance drowned out the good news.

Shares of Target were recently down $4.84, or 8.3%, to $53.59 after the No. 2 discount retailer in the U.S. said in a recorded call late on Monday that it expects November same-store sales to track below its previous forecast for an increase of 4% to 6%. The company said it based its warning on the results from the first two weeks of the month and forecasts for the next two weeks.

The flogging contributed to a 1.8% decline in the S&P Retail Index, which is up 5% since the start of November.

Traders viewed Target's warning as particularly ominous given the company's recent history as a top performer among major retail chains. The disappointment bolstered arguments that rising interest rates, high debt levels, soaring energy prices and a soft job market would all combine to bring on a slowdown in consumer spending that many market watchers have long claimed is inevitable.

Other traders shrugged off this view based on promising results from other retailers and the government's retail sales report for October that blew away economists estimates on Tuesday.

The Commerce Department said retail sales for October fell 0.1%, beating Wall Street's expectations for a 0.7% drop. Factoring out vehicle sales, retail sales gained 0.9%, slowing from a 1.4% improvement in September but wiping out estimates.

The overall weakness in October came from a 3.6% drop in auto sales, reflecting the ongoing problems at U.S. automakers like

General Motors

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and

Ford

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. The strength in sales elsewhere was led by big gains at specialty clothing stores and department stores, boosting the outlook for holiday shopping.

The news came a day after

Wal-Mart

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deflected some concern about the spending habits of its customer base, which is viewed on Wall Street as being particularly susceptible to the strain of high energy prices. Its 3.8% increase in profits from last year marked the company's slowest bottom-line growth in three years, but the discount giant sounded an upbeat note for the fourth quarter, predicting earnings to 82 cents to 86 cents a share. Wall Street's estimate for the quarter is 84 cents a share.

"Even with the lingering impacts of the hurricanes, and the impact of higher energy prices, I believe we will have a good holiday season," Scott said on a recorded call.

That goods news was accompanied by continued strength from retail's home-improvement sector, which proved an effective hedge against the economic fallout from an especially devastating hurricane season.

The largest home improvement chain,

Home Depot

(HD) - Get Report

, reported strong earnings and profit guidance despite the impact of the Gulf Coast storms.

Home Depot earned $1.54 billion, or 72 cents a share, in the quarter, compared with $1.32 billion, or 60 cents a share, last year. The latest quarter's earnings beat Wall Street estimates by 4 cents a share. Home Depot also said full-year EPS will rise by as much as 18%, up from its previous top-end estimate of 17%.

"The execution of our strategy and the focus on our fundamentals has enabled us to consistently and predictably deliver strong results," Home Depot said in a release. "We continued to drive productivity throughout our business, and are well on our way to becoming the low cost provider in our industry."

The company reported its number of customer transactions rose by 1.5% while the average transaction price was $58.92, up from $55.53 a year ago.

On the top line, third-quarter revenue rose 10.5% to $20.74 billion on a 3.6% rise in same-store sales. Analysts surveyed by Thomson First Call were forecasting sales of $20.69 billion.

"During the quarter, our merchants did a great job of adding innovative and distinctive products to our stores," the company said. "Our strategy of enhancing the core through distinction and innovation is working as evidenced by the highest average ticket in our company's history. We saw average ticket growth across the store with real strength in kitchen and bath."

Home Depot shares rose more than 1% on Monday after a similarly strong quarterly report from rival

Lowe's

(LOW) - Get Report

. Its quarterly earnings rose 25.8% to $639 million, or 81 cents a share, in the quarter, compared with $516 million, or 65 cents a share, in the same quarter last year. Sales totaled $10.59 billion in the latest quarter, up 17% from last year. Analysts were forecasting earnings of 77 cents a share on sales of $10.51 billion.

While both companies sustained store closings in Florida and along the Gulf Coast during a devastating hurricane season, hurricane-related sales more than made up for the gap. Lowe's said purchases of plywood, generators and other goods in the Southeast boosted same-store sales by 1 percentage point. Its total comps were up 6.3% for the quarter compared to last year.

"The vast majority of our consumers are homeowners and they are simply not willing to let their most valuable asset deteriorate," said Lowe's chairman and chief executive, Robert Niblock, on a conference call with analysts after the release.

He also said that customers expecting higher home-heating costs this winter are shopping at Lowe's for insulation, programmable thermostats and energy-efficient appliances to keep costs down.

Craig Johnson, president of Customer Growth Partners, said the strength in home improvement reflected a long-term trend toward consumer spending on home-related goods.

"Anything associated with investing in the home, whether it's maintenance, repair, appliances, or new-home projects are especially hot because people get two values out of it," Johnson said. "They get the consumption and enjoyment value, and then they get real estate investment value out of it. So, they're getting a lot of bang for their bucks."

Johnson said investors should be looking for other "sweet spots" in the retail market this holiday season. He recommended high-end, luxury retailers like

Nordstrom

(JWN) - Get Report

, and exceptional specialty retail outfits, like

Chico's

(CHS) - Get Report

and

Urban Outfitters

(URBN) - Get Report

.

As for Target's sales warning, Johnson said it should not be viewed as a sign that consumers are about to fizzle out.

After Target's sales warning, the retail sector was giving back some of Monday's gains on the news. Home Depot was recently down a nickel, or 0.1%, to $42.52. Lowe's shed 77 cents, or 1.2%, to $64.12. Wal-Mart dropped 43 cents, or 0.9%, to $48.87.

Johnson cautioned against reading too much into the disappointment.

"Everyone overreacted about consumer spending because of all the hurricanes and high gas prices," Johnson said. "There will probably be weakness at underperformers, like middle-market department store chains. But good retailers are going to do well. The shoppers will be there for the holidays."