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On Jun 19, we downgraded our long-term recommendation on Target Corporation (TGT - Analyst Report) to Underperform based on the company’s dismal first-quarter fiscal 2013 performance. The stock currently carries a Zacks Rank #4 (Sell).

Why the Downgrade?

Estimates of this operator of general merchandise and food discount stores in the United States have shown a downtrend since the company reported disappointing first-quarter results on May 22, 2013 that prompted management to take a conservative stance on its future earnings.

The quarterly earnings, including U.S. and Canadian operations, came in at 81 cents a share that dipped from $1.03 reported in the prior-year quarter. Target’s adjusted earnings of $1.05 per share also fell from $1.11 delivered in the year-ago quarter. This relates to results from U.S. operations only. However, it managed to exceed the Zacks Consensus Estimate of 85 cents.

Nevertheless, the bottom-line results came below Target’s earlier projection of $1.10 to $1.20 per share due to lower-than-anticipated sales witnessed principally in apparel and other seasonal and weather-related categories. Total revenue edged down 1% to $16,706 million from the prior-year quarter, and also came below the Zacks Consensus Estimate of $16,897 million.

Following soft first-quarter results, Target now projects fiscal 2013 earnings between $4.70 and $4.90 per share down from a range of $4.85 to $5.05 forecasted earlier.

Consequently, we are witnessing a fall in the Zacks Consensus Estimate. The Zacks Consensus Estimate for the second and third quarters of fiscal 2013 dropped 7.7% and 3.3%, to 96 cents and 88 cents a share, respectively, over the past 60 days. Moreover, the Zacks Consensus Estimate for fiscal 2013 fell by 3.8% to $4.32 and for 2014 it tumbled 1.6% to $5.46 per share, over the same time frame.

Cause for Concern

We expect the footfall to be challenging given the near-term headwinds such as higher payroll taxes, sluggish economic recovery and e-Commerce competition. The company also lowered its comparable-store sales guidance to 2%–2.5% from 2.7%. We believe that the macro-economic condition is still not favorable and consumers will tread cautiously against discretionary items. Another factor that limits the company’s upside potential is the greater concentration of Target’s revenue generating capability in a few regions of the United States, thereby posing a competitive threat.

Other Stocks That Warrant a Look

Not all stocks in the retail sector are performing as disappointingly as Target. Other stocks worth considering include Flowers Foods, Inc. (FLO - Snapshot Report), B&G Foods Inc. (BGS - Snapshot Report)  and Omega Protein Corp.  , all of which hold a Zacks Rank #1 (Strong Buy), and are expected to continue with their upbeat performance.

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