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Target Corporation (TGT) Seems Impervious to Mediocre Results

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In early March — following Target Corporation (NYSE:TGT)‘s  fourth-quarter 2012 earnings call — I wrote that while the company has reasonably good long-term opportunities, Target stock was already fairly valued. At the time, Target shares traded for about $64, and I did not expect significant upside from that level in light of the weak U.S. consumer spending environment.

As it turns out, I was half-right. Target Corporation (NYSE:TGT) had a challenging first quarter, and expects the consumer spending environment to remain weak. Nevertheless, Target stock hit a new all-time high of $71.91 recently, and remains near $69 as of Thursday’s close.

TGT Chart

Target 10-Year Price Chart, data by YCharts.

While Target Corporation (NYSE:TGT) has a strong brand and a potentially significant international expansion opportunity, it faces pressure from two directions. Competition from online merchants like Amazon.com, Inc. (NASDAQ:AMZN) will lead to pricing pressure in electronics and other hard goods, while other discounters like The TJX Companies, Inc. (NYSE:TJX) are beating Target Corporation (NYSE:TGT) at its own “cheap chic” game. At this point, I believe that Target stock is due for a correction, because the stock price has run well ahead of the company’s fundamentals.

First quarter in review
When Target Corporation (NYSE:TGT) provided its initial guidance for 0% to 2% comparable-store sales growth and adjusted EPS of $1.10 to $1.20 in the first quarter, I was skeptical that this was achievable in light of the weak consumer spending environment. Target ended up facing an additional (unexpected) headwind, because most of the U.S. had an unseasonably cold spring, which hurt sales of seasonal merchandise.

These trends led to updated financial guidance in mid-April. At the time, Target highlighted the poor weather trends and projected adjusted EPS “slightly below the low end of the prior guidance of $1.10-$1.20” on flat comparable-store sales. However, this announcement had no discernible effect on Target stock price, in part because the company reaffirmed its full-year guidance for adjusted EPS of $4.85 to $5.05.

However, this Wednesday Target reported adjusted EPS of $1.05, on a comparable-store sales decline of 0.6%. While the company did face a tough comparison to 2012 (when weather was much more favorable), the sales and earnings results were both below management’s expectations.

Moreover, management relented and lowered the full-year adjusted profit forecast to a range of $4.70 to $4.90 and the full-year comparable-store sales guidance from 2.7% to a range of 2% to 2.5%. As a result of these announcements, Target stock slid by about 4% on Wednesday.

Downside risks remain
While Target has already reduced its expectations for 2013 results, the company faces significant risks that could lead to even lower performance, which would in turn pressure Target stock. Most notably, Target seems to be losing market share to other retailers like off-price leader The TJX Companies, Inc. (NYSE:TJX) (the parent of T.J. Maxx, Marshalls, and HomeGoods). TJX managed to post comparable-store sales growth of 2% last quarter despite facing the same adverse weather effects and strong prior-year results as Target.

Moreover, TJX’s total revenue was up 7% as the company continues to aggressively expand, and the management team recently increased its estimate of TJX’s domestic growth opportunity. TJX, like Target, appeals to consumers by offering high-quality fashion and soft goods at a low price. The continued growth of TJX is likely to squeeze Target in some of its highest-margin categories.

Foolish conclusion
While Target stock has delivered solid gains for shareholders this year, the company has not backed this up with strong fundamentals. It is only May, and Target has already reduced its full-year sales and earnings guidance.

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