Here's one of those examples where our research process churns out a name that synchs with both our fundamental models and Keith's timing/sizing process.  Yes, I'm referring to none other than Target. Earlier today, Keith flagged us with TRADE and TREND resistance levels of $39.18 and $38.74, respectively.

Of course, this action warrants a deeper look into the fundamentals to see what is really going on out there with sales, earnings, and sentiment.  Looking at the near term, expectations are now reasonably high given the EPS update we received on Thursday along with sales last week.  We all know the compares become extremely easy once we get past 2Q -- a fact that is pretty much universal for the entire sector.  The CFO blessed 2Q EPS of $0.64 by saying they'll "meet or exceed it", driven by expense control and gross margin upside.

We're now near real-time with sentiment and reality given the sales report was given only two trading days ago.  With news already out there, the Street responded by moving up estimates to $0.66.  Additionally, there is now an expectation that they'll beat the new number by another couple of cents.  This is a similar chain of events to the one that unfolded last quarter and is nothing new with how the Street resets expectations when TGT uses the term "meet or exceed". 

If 2Q results were to blow out the revised numbers and really squeeze us, the company would need 1) to see a meaningful pick up in apparel and home, both of which show no signs of improvement at the moment for TGT.  Consumables are the dominant driver here and will likely remain so, which puts some cap on the gross margin upside.  2) Admittedly, credit profits can and will likely improve, which could also result in EPS upside.  However, the company has been signaling improvement in credit quality and is not in a position to go full force on taking down reserves to drive EPS higher. 

Regardless, I see credit as a catch-22.  They either have trouble with it and the Street gets worried about the risk associated with a retailer running a credit card or they actually drive EPS upside with credit but the Street then wonders what multiple to pay for credit-driven results when in reality TGT is a retailer...

Missing is not a high probability outcome for the current quarter either.  This is more sentiment vs. rising expectations than anything else.  Inventories and product mix are predictable enough such that it is unlikely to see a miss.  Looking out into 4Q with the easy compares, the real exercise is in how aggressive the Street is vs. how aggressive management guides.  Historically, against easy compares the company leans on the conservative side of things...

TGT: Notable TREND/TRADE Resistance - 7 13 2009 5 54 55 PM

Eric Levine