Recession takes its toll on Target

You’d think these would be great days for discounters, and in some ways, they are. However, Target (NYSE: TGT) has failed to draw crowds of customers, so maybe its “cheap chic” reputation is striking many shoppers as too chic and not cheap enough.

First-quarter net income at Target fell 13 percent, to $522 million, while revenue rose a scant 0.2 percent, to $14.83 billion. That sounds bad, but it was still better than many analysts expected.

The quarter reflects a current trend in retail: flagging profitability and a failure to grow traffic and revenue. Things are tough all over. Although this is Target’s seventh consecutive quarter of profit decline, Wal-Mart (a Motley Fool Inside Value recommendation) recorded only flat net income in its most recent quarter, with sales dipping 0.6 percent, in part due to the strong dollar. Still, Wal-Mart has been gaining market share, as nervous consumers have been attracted to its low-priced products. Another rival, BJ’s Wholesale, reported an impressive 41 percent increase in quarterly earnings. At this time, Target doesn’t look terribly alluring by comparison.

There’s much to like about Target’s business, but a wait-and-see approach may be best at the moment, until it can show some earnings traction. Ninety percent of participants at our http://CAPS.Fool.com who have rated the company (nearly 2,000 people) are bullish on it.

Ask the Fool

Q: What are these “option ARMs” I’ve heard about that contributed to our financial meltdown? – W.D., Omaha, Neb.

A: They’re a creative and potentially dangerous kind of adjustable-rate mortgage (ARM). First, remember that with a traditional mortgage, you put down 20 percent or so on a house and borrow the balance from a bank, with either a 15- or 30-year fixed-rate mortgage, or a simple ARM that gives you a low introductory rate for maybe five or seven years before starting to gradually raise or lower its interest rate according to prevailing rates.

Well, in the housing market’s recent go-go years, financial institutions started offering aggressive loans to enable more people to buy homes, and precarious option ARMs were among them. As you can learn at mtgprofessor.com, you’ll know you’re looking at an option ARM if you’re being offered a loan where the interest is adjusted monthly, and you can end up with a growing debt by opting to make minimum payments.

Option ARMs are attractive because they start out with low payments. When their rates reset, they can do so sharply, whacking borrowers with much steeper payments. But borrowers can often just make minimum payments instead, hiking their loan balance, even beyond the value of their home.

Q: What are the “trade date” and “settlement date” on my brokerage statements? – S.H., Detroit

A: When you place an order to buy or sell a security with your broker, there will be a “trade date” and “settlement date” recorded. The trade date is the date the order was executed, and it counts for tax purposes. The settlement date is just the date when the cash or securities from the transaction are plunked into your account.

My dumbest investment

I subscribed to an options-trading newsletter, when I had about $24,000 to invest. I found a service that would automatically place all the trades recommended by the newsletter, and two months later, I had just $3,000 left. – M.D.F., Hong Kong

The Fool responds: Ouch. There are several lessons here. For starters, know that investing newsletters vary widely in their quality and in their performance results. Poor ones will probably not make it easy for you to find out that they’re lackluster. Next, know that options can be extremely risky investments. There are ways to use options relatively conservatively, but many people try to maximize their gains via options, which means they’re also making themselves vulnerable to taking big hits. With options, you can lose much more than you invest. Most options will pay off for you if a certain security moves at least a certain amount in a certain relatively short time frame. But that can be a big guessing game, and most options expire unexercised, taking the option-trader’s money with them. You can do well in investing while avoiding options entirely.