Risk Reward Balances Target - Analyst Blog

Target Corporation ( TGT ) is persistently trying every means to keep afloat in this turbulent environment. The company's P-fresh remodel program, 5% REDcard Rewards program, City Target stores and its foray into foreign markets are its arsenal to battle the economic downturn.

Initiatives Undertaken

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 in a sluggish consumer environment.

The company now focuses more on store renovations and improving store sales productivity. In fiscal 2011, Target plans to remodel nearly 380 stores, which include an expanded grocery offering, improved store layout, and enhancement of in-store shopping experience across departments, such as, beauty, home, electronics and video games, aimed at increasing traffic. During the third quarter of 2011, Target remodeled 133 locations and now operates 875 stores having expanded food layout.

Management indicated that Target's P-fresh remodel program and 5% REDcard Rewards program will sustain sales momentum, continue to drive traffic and enhance customer shopping experience. The company in order to attract customers is also providing an additional benefit of free shipping for any e-shopping, to its cardholders, who are already getting 5% off for the purchases they make.

Efforts Bearing Results

Target recently posted healthy third-quarter 2011 results on the heels of higher sales and improved profitability across the credit card business. The quarterly earnings of 87 cents a share increased 28% from 68 cents earned in the prior-year quarter.

Including special items, earnings came in at 82 cents compared with 74 cents posted in the year-ago quarter. The third quarter results included expenses in connection with the company's investments in the Canadian market, which lowered earnings by approximately 5 cents a share. The prior-year earnings included a gain of 6 cents a share related to favorable state income tax settlements.

The Zacks Consensus Estimate for the quarter was 74 cents. Management now projects fourth-quarter 2011 earnings between $1.43 and $1.53 per share.

Total revenue for the quarter climbed 5.1% to $16,402 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $16,330 million.

Tapping 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 like 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 to 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 the approach will help the company to augment its sales. Target, will unveil its first smaller format store in Seattle in 2012, with plans to open similar format stores in 10 U.S. cities, including Chicago, Los Angeles, San Francisco, Boston, Baltimore and Miami.

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 the 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 improve cash flow generation capability.

Tough Economy Still a Threat

The sea doesn't seem to be calm. 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 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 long-term Neutral stance on the Target. However, better-than-expected results and the strategies undertaken that help the company to improve its performance are well defined through a Zacks #2 Rank that translates into a short-term Buy recommendation.

COSTCO WHOLE CP ( COST ): Free Stock Analysis Report

TARGET CORP ( TGT ): Free Stock Analysis Report

WAL-MART STORES ( WMT ): Free Stock Analysis Report

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos


Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at

Learn More