Analyst says investors can expect more

Bernstein Research analyst Colin McGranahan initiated coverage of Target last week (along with Walmart and Costco) and he likes what he sees. He expects shares of Target to outperform the market, whereas he rates Walmart and Costco as market peformers.

“The fundamental controversy for Target is whether the company's positioning as an ‘up market discounter’ is permanently impaired in a potentially more austere consumer environment,” according to McGranahan. “While Target's recent struggles are certainly a function of this positioning, we expect a strong reversal in trends in both the retail and credit business over the next few years as the recession gradually shifts back toward economic expansion. In addition, Target’s strong operating performance during the downturn, with solid gross margin performance and impressive expense control, positions the company well for an upturn.”

McGranahan’s earnings estimates are well above analysts’ consensus figures for the next two years and that’s without giving much credit to Targets’ efforts to grow its food business. “Expanding the food category is a focus for the company, but we are skeptical that Target will see much success here. We have built little into our model in the way of expectations around food,” according to McGranahan. “Overall, however, we think Target's growth and earnings outlooks are quite attractive.”