Amidst sluggish economic environment, cautious consumer spending
and intense competition,
Target Corporation
(
TGT
), the operator of general merchandise and food discount stores in
the United States, 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,
which 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. The quarterly
earnings dovetails with the company's previous projection of $1.04
to $1.14 per share.
The healthy results prompted management to raise its fiscal 2012
earnings expectations.
Let's Unveil the Picture
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 their wallets but remain wary.
Minneapolis, Minnesota-based Target said that comparable-store
sales for the quarter rose 3.1% compared with 3.9% increase
registered in the prior-year quarter. The number of transactions
rose 0.7%, whereas the average transaction amount climbed 2.4% in
the
quarter.
Gross profit at the Retail segment jumped 2.6% to $5,154
million; however, gross margin shrank 30 basis points to 31.3%, as
the rate of increase in sales were not able to fully offset 3.9%
rise in cost of sales. Segment operating income increased 2.9% to
$1,181 million, whereas operating margin remained flat at 7.2%.
The company indicated that revenue from the Credit Card segment
tumbled 5.1% to $328 million. Target also said that segment profit
dropped to $140 million in the quarter from $171 million in the
prior-year period.
Target's credit card penetration increased 110 basis points to
7.7%, whereas debit card penetration expanded 300 basis points to
5.1% during the quarter. Total store REDcard penetration climbed to
12.8% from 8.7% in the year-ago quarter.
Target's P-fresh remodel program, 5% REDcard Rewards program and
The Shops at Target will help sustain sales momentum, continue to
drive traffic and enhanced customer shopping experience. The
company's focus on "Expect More. Pay Less." brand promise is also
bearing fruits.
Further, Target, in order to tap the urban markets where real
estate remains a constraint, plans to introduce smaller-format
stores called CityTarget, and opened its first three stores in
Seattle, Los Angeles and Chicago. Moreover, in order to expand its
global footprint, the company is eyeing the Canadian market with an
expected entry in 2013.
Other Financial Details
During the quarter, 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 ended the quarter with cash and cash equivalents
(including short-term investments of $830 million) of $1,442
million, total unsecured debt and other borrowings of $17,014
million and shareholders' equity of $15,897 million.
Stores Update
Target currently operates 1,772 stores, of which 428 are general
merchandise stores, 1,090 are expanded grocery assortment, 251 are
SuperTarget stores and 3 are CityTarget stores.
Strolling Through Guidance
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.
The current Zacks Consensus Estimates for the third quarter and
fiscal 2012 are 76 cents and $4.29 per share. Given the company's
guidance range we could witness correction in the Zacks Consensus
Estimates in the coming days with analysts revising their estimates
to better align with the company's outlook.
Let's Conclude
Target'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 a
continued sluggish economy and retail market.
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 more focus on consumable items should boost
sales and earnings. 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 economy has not yet recovered fully. 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.
Moreover, a greater concentration of the company's
revenue-generating capabilities in limited regions of the U.S.
poses a competitive threat to Target, compared with
Wal-Mart Stores Inc.
(
WMT
) and
Costco Wholesale Corporation
(
COST
), which are more geographically diverse.
Currently, we maintain our long-term Neutral recommendation on
the stock. However, Target retains a Zacks #2 Rank that translates
into a short-term Buy rating.
COSTCO WHOLE CP (COST): Free Stock Analysis
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TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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