Target Is Looking Attractive on Current Weakness

Shares of Target (TGT) are selling off steeply this morning following the company’s earnings results. Investors seem to be focusing on the disappointing digital sales growth, which, as we mentioned earlier, was up 20% for the quarter versus the company’s guidance of a 30% gain. Disappointing gross margins are also contributing to the decline.

That being said, although we are restricted, we would be buyers of the stock down at these depressed levels as we think the selloff is overdone and has priced in these disappointments. While we are frustrated with the weaker-than-expected digital performance (given that CEO Brian Cornell had made such a big deal over the company’s prospects in that area, and led us to believe the results would be outstanding), we think the stock is overreacting to the downside -- just as it had overreacted to the upside in previous quarters. Admittedly, we are disappointed that we did not take advantage of the rally in shares when the time came.

We are not re-thinking our overall view on the company, although we do believe management needs to buckle down in order to emerge from the “dog pound” of retailers (see: Macy’s (M) ) as we enter the most important selling season. The company still returns an abundance of cash to shareholders (driven by its strong free cash flow yield) through dividends and buybacks, and boasts a great balance sheet. In addition, they have been shifting focus to the right types of initiatives to continue growth.

We are on the investors’ call now, and will be intently listening to Cornell’s commentary on digital and the outlook moving forward (especially with the holiday season quickly approaching).

Regards,

Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long TGT.