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Taking Aim At Target


As oil continues its rampage, squeezing shoppers' budgets, the outlook for retailers looks bleak. In fact, when oil hit $70 a barrel on Aug. 30, retail stocks had the second-worst showing among all industry groups in the Standard & Poor's 500-stock index. "We think investors should be increasingly selective with retail," says Mark Miller of brokerage William Blair. Target () dropped $1.58, to 54.14, that day and a further 40 cents the next day, even though the S&P 500 rose 1%. But the sell-off may be a good time to buy in. Miller expects same-store sales to increase by 5.8% for 2005, vs. a 5.3% gain last year, at a time "that is shaping up to be pretty challenging for everyone else." Target, with its 1,351 stores, is a discounter that appeals to middle- and high-income types, so oil prices aren't such a hit to the wallet, says Miller. The company's ad campaign resonates with shoppers, he adds, as do partnerships with high-end brands such as garden-furniture maker Smith & Hawken () and designers like Isaac Mizrahi. Target also has strength in procurement and factory management with its foreign suppliers. Miller's earnings estimate is $2.68 a share for 2005 and $3.08 for 2006. He doesn't issue price targets. Another bull, Bill Dreher of Lehman Brothers (), has a 12-month price target of 68.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Mara Der Hovanesian


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