1 Big Retailer Stumbles, Falls Behind

This morning's earnings release from Target contained a few surprises -- and not the good kind. The retailer failed to hit the bar analysts had set up, and the stock had fallen 3.5% by midday. The biggest issue for Target is the slowdown in foot traffic. The resulting shortfall forced the company to drop its overall earnings forecast for the full year. In short, things are not looking great over at Target, and it might be time for investors to bow out.

Target misses the boat
The retailer cited softness in its apparel sales, a problem that has plagued apparel retailers all year. The long winter meant that customers were less likely to start buying spring clothes early in the year. That reluctance meant that the total number of transactions suffered, accounting for a 1.9% drop in comparable sales for Target. The company was able to regain a bit of ground, though, due to an increase in average transaction size. The combination of the two left Target with a 0.6% decline in comparable store sales.

Trickle that down to earnings per share, and the company was staring down a 5% drop, from $1.11 per share in 2012 to $1.05 this year. The fall meant that management had no choice but to drop its yearly earnings-per-share expectations, down from $4.85-$5.05 to $4.70-$4.90.

What should Target investors do?
Compared to others in the sector, Target is middle-of-the-pack. The leader is clearly Costco , which has managed to pull in more customers through its bulk discounting. While the company has not reported its current quarter earnings yet -- the report comes out at the end of the month -- monthly comparable sales have been rising.

Costco has managed to buck the issues that seem to have hampered Target. Last quarter, Costco recorded more transactions, with larger average transactions, both of which resulted in a 5% favorable comparable-sales increase for the quarter.

If Costco is the front-runner of the business, Wal-Mart looks increasingly like it's bringing up the rear. The company blamed inflation, weather, income tax returns, and health care tax in its recent poor showing. Comparable sales fell 1.5% last quarter, and Wal-Mart management was quick to point the finger outside of the company. Even with those issues,it managed to increase earnings per share.

The problem for Target investors is that the cost of moving to a better-performing business may not make sense. Although Target has failed to keep up with returns for the S&P 500 over the last 12 months, it's still up 22%. That's roughly in line with Wal-Mart's return, but well short of the 37% that Costco has gained.

That success comes at a cost, though. While Wal-Mart and Target both trade at P/Es below 16, Costco is trading at 26. If I were invested in Target, I'd seriously consider a switch of allegiance. Target seems to be stumbling -- by no means failing, just stumbling -- while Costco is soaring.

Before you sell or buy any of these retailers, make sure to check out our detailed report on Costco, containing in-depth analysis on the company and one year of free updates on important company news. Simply click here now to gain instant access to this valuable investor's resource.

The article 1 Big Retailer Stumbles, Falls Behind originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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