Seeking Alpha
Long/short equity, contrarian, newsletter provider, research analyst
Profile| Send Message|
( followers)  

By Neal Rau

Big department store retailer' stocks have been struggling recently. Companies like Target Corporation (NYSE:TGT), Wal-Mart Stores, Inc. (WMT) and Macy's, Inc. (M) stocks have all seen big pullbacks in the last month, as U.S. consumers are not spending as much of their money in department stores. Target is in the midst of its first expansion outside the U.S., which might help the company find consumers who are willing to spend. Is Target's stock a good buy now?

Target opened 68 new stores in Canada in the first half of the year, as well as 10 new stores in the United States. A majority of these stores will feature a licensed Starbucks Corporation (SBUX) and in-store pharmacies. The expansion will bring expenses associated with the stores, which will affect margins. Some investors have been concerned that the Canadian expansion might not go as well as planned, which probably contributed to the recent decline in the stock price.

Shares of Target rose 14% from the March expansion into Canada, and then fell after the company announced its second-quarter report. Analysts had expected the company to post earnings of 96 cents per share. Target's revenue increased 2.4% to $16.8 billion from $16.5 billion last year. However, that fell below analyst expectations of $17.26 billion. Revenues at Target stores rose 1.2%, below the 1.9% analysts had expected. Had the Canadian operations not reduced Target's earnings, the company would have earned $1.19 per share, and beat Wall Street expectations.

While the expansion into Canada will continue to drive significant sales growth, the Canadian business will post a big loss this year, and Target CEO Gregg Steinhafel admitted that the Canadian division is unlikely to earn a profit next year, either. Strong initial sales trends in Canada did not hold up, which explains why the company reduced expectations. Target's Canada entry and this year's holiday sales could be the swing factors for the stock over the next few quarters. According to the Stock Traders Daily real time trading report for TGT, the stock is currently testing long-term support, so as these corporate operations unfold, the stock price itself will likely be a leading indicator.

The importance of holiday sales is going to be magnified this year with the recent weakness over the past quarter. Many large retailers announce their plans for hiring seasonal workers in advance. Last year Target said it would hire 80,000 to 90,000 seasonal employees, this year's numbers are due out soon, and those may also provide an early view of what the company expects in terms of holiday sales. Holiday sales coupled with revenues from Canada will be watched closely by investors, but again, it is all about the stock price for investors.

This is Target's first expansion outside the U.S., and investors should recognize that this involves more risk than just opening more stores in the United States, but Target's stock is currently testing long-term support, and as a rule we buy near support. If support holds, Stock Traders Daily expects the stock to trade higher and test resistance. However, support also acts as our risk control, so if support breaks lower those buy signals would dissolve. Right now that makes the case for Target hopeful on a price-basis, but it is only at support because of the risks, so make sure to respect support.

Source: Questions Remain, But Target May Be A Buy