Unease over Target's credit cards

Your Money

August 06, 2006|By ANDREW LECKEY | ANDREW LECKEY,TRIBUNE MEDIA SERVICES

I thought Target Corp. was such a great company. Why haven't my shares done better this year?

- K.L., via the Internet

The nation's second-largest discount retailer is a fine company, renowned for offering merchandise with style and low price. Nonetheless, it can never relax in its competition with industry leader Wal-Mart Stores Inc.

Target has more than 1,400 stores; about 140 of them are SuperTarget stores with bigger grocery departments. It intends to add about 100 stores this year but has no plans to go overseas anytime soon. That compares with about 5,700 Wal-Marts in several countries.

Recent concerns about Target that have hurt its stock price don't involve comparative store count, however, but its rapidly growing credit-card operation. Its success there could turn out to be too much of a good thing.

A large portion of Target earnings lately have come from that credit-card business, rather than retail sales, which could become worrisome if the economy tanks and delinquent accounts increase significantly. Management says its credit-card business is sound.

While June sales were better than expected as Target outpaced Wal-Mart and other competitors, it reduced its same-store sales forecast for July. It has deeply discounted its furniture and Global Bazaar home accessories, and there are doubts about grocery profit margins.

Shares of Target (TGT) are down 16 percent this year after last year's 6 percent gain. The company recently increased its regular quarterly dividend. It has a significant amount of debt but generates enough cash to service it.

The consensus analyst rating on Target shares is a "buy," according to Thomson Financial, which consists of five "strong buys," 11 "buys," seven "holds" and one "sell."

Earnings are expected to increase 15 percent for its fiscal year ending in January, compared with 12 percent forecast for the discount variety store industry. The expected five-year annualized return is 15 percent versus 14 percent for its peers.

My 88-year-old mother told me to read your column because she said you're "a very smart boy." So could you please tell me if you think Calamos Growth and Income Fund is a good investment?

- R.P., via the Internet

Smart woman, your mother. I feel younger already.

This fund was hit hard in the market's latest downturn, but in the long run has been an outstanding investment and a good way to diversify an individual's portfolio. It invests primarily in convertible securities, which are either preferred stock or bonds.

The $6.3 billion Calamos Growth and Income Fund (CVTRX) is up 6 percent over the past 12 months and has a three-year annualized return of 10 percent. Both results rank in the upper third of convertible securities funds.

"John Calamos and his nephew Nick Calamos have been in charge a long time, building a boutique investment shop into a solid organization that delivers the goods across a number of their funds," said Kerry O'Boyle, analyst with Morningstar Inc. in Chicago. "An investor nearing retirement who wants to ease back on equity exposure but not go whole hog into bonds just yet could see this fund as a nice hybrid."

Convertible securities make regular dividend or coupon payments, though yields are lower than those of regular bonds, and give the opportunity to convert at some point to common stock at a preset ratio.

"Despite their positives, convertibles are a small niche area of the overall market and we wouldn't recommend putting more than 10 percent of your overall portfolio into them," O'Boyle said. "They can be a quirky market."

yourmoney@tribune.com

Andrew Leckey writes for Tribune Media Services.

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