David Campbell of Davenport & Co. agrees that 15% profit growth might be optimistic and said growth could slow, especially this year, but he still thinks the sale was a must. "The Target stores have a lot of growth potential, and they'll continue to do that," he said. "It would worry me if the stock were at a higher valuation. The stock is reasonably valued and the slowdown is priced in."
Shares of Target were lately up 6 cents at $44.39, just below their 52-week high of $47.40.Target stores are still increasing square footage by 8% to 9% a year, Campbell said, which is a big positive for future growth. Another positive is that the company also has a redesigned, more shopper-friendly format for its new stores. Assuming modest same-store sales growth and flat to slightly positive operating margins, Campbell sees 12% to 15% average annual earnings growth as possible. "Sure, in the last few years the economy has been difficult and they have suffered with their comps, especially against harder comparisons. That very well may be the case this year. That lower-end customer still isn't very strong," Campbell conceded. But he is still planning for same-store sales growth of about 2% in the back half of 2004. (Campbell doesn't own shares of Target and his company does not do investment banking.) And while Campbell admits Target's credit card receivables have slowed lately, they are still an important income driver for the company, he said. Mark Mandel, an analyst at Fulcrum Global Partners, agrees that a standalone Target is better off. The two sales "make the company a pure play in a well-positioned discount store format," he said, calling the discount store division its "core competency." Mandel expects same-store sales in the 4% range going forward with top-line growth close to 10% and profit growth of about 14%, due in part to the company's expansion plans. (Fulcrum Global Partners does not do investment banking.)