The cheap chic retailer beat the Street handily in its latest earnings numbers. That's no surprise, considering the dismal performance of Target (NYSE: TGT) as compared to peers over the past year. The drugstore that stocks everything nearly destroyed a hedge fund run by legendary investor Bill Ackman designed solely to bet on Target shares. I think Target's rebirth may not be long-lived. Piqqem Sentiment for Target is neutral. Investors may be giddy today but they should consider the obstacles to a full-blown revival.Here's why. The company's growth in groceries just means more reliance in a notoriously low-margin and fickle consumer environment where they compete with brutal sharks such as Costco and Wal-Mart. Getting into the food biz is nothing to crow about, but that's just what the Target CEO Greg Steinhafel did on the conference call when he said the chain was seeing real gains in food shopping at Target stores.
Further, the long-term consumption shift in the American consumer will mean people buy less cheap stuff they don't need, which was a key market for Target (cheap faux designer kitchen wares, anyone?). Problems with credit cards will damage Target's future earnings power, something that has already started to happen and will only continue as charge-offs mount. Steinhafel said that credit cards revenues and earnings were in good shape. But if even the big guys like Capital One can't get a handle on charge-offs and have to keep upping their tallies, how could a relative amateur like Target really know what the future holds in this arena?
Even the giddy stock market response to Target's less worse earnings is questionable based on the happier numbers. Same store sales still fell by 3.7% year over year, hardly a sign of good health. Other big retailers like Wal-Mart have not see this same magnitude of same store sales decline. Profit on the quarter still fell by 13%. In short, the whole bull case is built on a less-bad scenario and it might have a little bit to run. But the emerging environment for Target and the direction it's business is taking is hardly favorable for the long-term.
Alex Salkever is the Director of Research at Piqqem.com, a stock analysis and prediction community powered by the Wisdom of Crowds.
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