The U.S. economy is still grappling with an uneven recovery, and
companies are tussling to shield themselves from the financial
turmoil.
Target Corporation
(
TGT
) is persistently trying every means to keep itself afloat in this
sluggish economic environment.
The company's P-fresh remodel program, 5% REDcard Rewards
program, City Target stores, The Shops at Target initiatives and
its foray into the foreign market are its arsenal to safeguard
itself from any unprecedented events.
The Company Counts Upon
Target's efficient marketing, multi-channel strategy, product
innovation, compelling pricing strategy, and new merchandise
assortments, should drive comparable-store sales and operating
margins in the long term. We expect the company to gain market
share, and believe that increased focus on consumable items should
boost sales and earnings in a soft consumer environment. The
company's long-term objective is to attain $100 billion or more in
sales and $8.00 or more in earnings per share by 2017.
The company will focus more on store renovations and improving
store sales productivity. This year, Target plans to sustain its
remodeling program at existing general merchandise locations, which
include an expanded grocery offering, improved store layout and
enhancement of in-store shopping experience across departments,
such as apparel, home, beauty, shoes and baby. The company plans to
complete about 230 more general merchandise remodels in the
year.
Management indicated that Target's P-fresh remodel program and
5% REDcard Rewards program will sustain its sales momentum and
continue to drive traffic. With ever changing consumer preferences,
Target feels the need to adapt to the demands of time and consider
consumer-oriented strategies. The recent one, 'The Shops at
Target,' are small boutiques in stores, and are similar to
J. C. Penney Company Inc.
's (
JCP
) store-within-store concept.
Tapping the Urban Market
In order to tap the urban markets where real estate remains a
constraint, Target plans to introduce smaller-format stores called
City Target similar to its biggest rival,
Wal-Mart Stores Inc.
(
WMT
). The company informed that the new stores will vary in size from
60,000 to 100,000 square feet compared to its typical format of
125,000-180,000 square feet.
Earlier, Target used to concentrate on the suitability of its
large format stores for a particular location, which lowers its
accessibility to the country's thickly populated and space-crunched
urban regions. However, with the changing business scenario and
rising competition, Target felt the need to have stores of various
sizes and formats to align with the targeted area.
We believe that this approach will help the company augment its
sales. Target unveiled its first three smaller format stores in Los
Angeles, Seattle and Chicago, with plans to open two more similar
format stores, one each in Los Angeles and San Francisco.
Efforts Reaping Results
Amidst the lackluster economic environment, cautious consumer
spending and intense competition, Target posted
better-than-expected second-quarter 2012 results on the back of
healthy sales. Lower shares outstanding also provided cushion to
the bottom line.
The company delivered quarterly earnings of $1.06 per share that
rose 3.4% from $1.03 earned in the prior-year quarter, and also
came ahead of the Zacks Consensus Estimate of $1.01. However,
excluding costs related to Canadian operations, earnings from its
U.S. operations came in at $1.12 per share, up 4.6% from $1.07
posted in the year-ago quarter.
Total revenue climbed 3.3% to $16,779 million from the
prior-year quarter, and beat the Zacks Consensus Estimate of
$16,769 million. Retail sales grew 3.5% to $16,451 million as
shoppers are gradually opening up their wallets, though they remain
wary. However, revenue from the Credit Card segment tumbled 5.1% to
$328 million.
The healthy results, prompted management to raise its fiscal
2012 earnings expectations. Target now projects adjusted
third-quarter 2012 earnings between 83 cents and 93 cents a share.
For fiscal 2012, earnings are expected to be in the range of $4.65
to $4.85 per share, up from $4.60 to $4.80 forecasted earlier.
On a GAAP basis, including expenses related to the company's
entry in the Canadian market, management projected earnings between
69 cents and 79 cents for the third quarter and between $4.20 and
$4.40 per share for fiscal 2012, up from $4.10 and $4.30 projected
previously.
Rewarding Shareholders
Target is actively managing its cash flows and returning much of
its free cash to shareholders' through share repurchases or
dividend. These strategies not only enhance shareholders' return
but also raise the market value of the stock. Through this
strategy, the companies bolster investor confidence in the stock,
and thereby persuade them to either buy or hold the scrip instead
of selling off.
During the second quarter of 2012, Target bought back about 9.6
million shares at a price of $57.09 per share, aggregating $549
million, and also paid dividends of $198 million. The company
recently hiked its annual dividend by 20% to $1.44, and expects it
to increase to $3.00 per share or more by 2017.
The Need to Diversify
The greater concentration of the company's revenue generating
capabilities in limited regions of the United States, poses a
competitive threat to Target, compared with Wal-Mart and
Costco Wholesale Corporation
(
COST
), which are geographically diverse and more resourceful.
Target is eyeing opportunities in international markets, such as
Canada and Latin America. The company plans to open 125 to 135
stores in Canada by 2013 and 2014. We believe, store openings
outside the United States will definitely boost the company's top
and bottom lines and better its cash flow generation
capability.
Tough Economy Still a Threat
The economy is still not out of the woods. It is evident that
the company's customers remain sensitive to macroeconomic factors
including interest rate hikes, increase in fuel and energy costs,
credit availability, unemployment levels, and high household debt
levels, which may affect their discretionary spending, and in turn
curtail the company's growth and profitability.
The global credit markets have recently undergone a significant
disruption. This may create difficulties for companies to obtain
financing on reasonable terms, aggravating the risk of higher cost
of borrowings and diminishing the ability to obtain additional
financing or refinance existing long-term obligations. This may
jeopardize the company's future growth plans.
Wrapping Up
The above analysis supports our unbiased view on the stock, and
therefore, we advocate our long-term Neutral recommendation on the
stock. However, Target retains a Zacks #2 Rank that translates into
a short-term Buy rating and well defines the company's relentless
endeavors to keep itself on the growth trajectory.
COSTCO WHOLE CP (COST): Free Stock Analysis
Report
PENNEY (JC) INC (JCP): Free Stock Analysis
Report
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
Report
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