Target's Adjusted EPS Beats Est - Analyst Blog

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 fourth-quarter fiscal 2012 results.

The quarterly earnings including U.S. operations and costs related to Canadian operations came in at $1.47 per share that is up from $1.43 reported in the prior-year quarter on the back of healthy sales. Lower shares outstanding also provided cushion to the bottom line.

However, the company posted adjusted earnings of $1.65 per share substantially up from $1.49 delivered in the year-ago quarter. This relates to results from U.S. operations only. Analysts polled by Zacks had projected earnings of $1.48 per share for the quarter.

Let's Unveil the Picture

Total revenue climbed 6.8% to $22,726 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $22,642 million. U.S. retail sales grew 6.8% to $22,370 million as shoppers are gradually opening up their wallets but still remain wary.

Minneapolis, Minnesota based company, Target, said that comparable-store sales for the quarter rose 0.4% compared with 2.2% increase registered in the prior-year quarter. The number of transactions edged down 1%, however, the average transaction amount climbed 1.4% in the quarter.

Gross profit at the U.S. Retail segment jumped 4.3% to $6,210 million; however, gross margin shriveled 60 basis points to 27.8%, as the rate of increase in sales were not able to fully offset 7.8% rise in cost of sales. Segment operating income increased 3.2% to $1,677 million, whereas operating margin contracted 30 basis points to 7.5%.

The company indicated that revenue from the Credit Card segment increased 1.8% to $356 million. However, Target indicated that segment profit rose to $141 million in the quarter from $98 million in the prior-year period.

Target's credit card penetration increased 110 basis points to 8.5%, whereas debit card penetration expanded 360 basis points to 7% during the quarter. Total store REDcard penetration climbed to 15.5% from 10.8% in the year-ago quarter.

Target's P-fresh remodel program, 5% REDcard Rewards program and Price Match strategy will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. In order to tap the urban markets where real estate remains a constraint, the company plans to open smaller-format stores called CityTarget. Moreover, in order to expand its global footprint, the company is eying Canadian market with a store opening plan of 124 in 2013.

Other Financial Details

During the quarter, Target bought back about 10.4 million shares at a price of $61.96 per share, aggregating $645 million, and also paid dividends of $234 million.

The company ended fiscal 2012 with cash and cash equivalents (including short-term investments of $130 million) of $784 million, total unsecured debt and other borrowings of $16,148 million and shareholders' equity of $16,558 million.

Stores Update

Target currently operates 1,778 stores, of which 391 are general merchandise stores, 1,131 are expanded grocery assortment, 251 are SuperTarget stores and 5 are CityTarget stores.

Strolling Through Guidance

Target now projects adjusted earnings in the range of $1.10 to $1.20 for the first quarter and between $4.85 and $5.05 per share for fiscal 2013.

On a GAAP basis, including expenses related to the company's entry in the Canadian market and accounting impacts related to the divestment of consumer credit card receivables portfolio, management forecasted earnings between $1.22 and $1.32 for the first quarter and in the band of $4.70 to $4.90 for fiscal 2013.

The current Zacks Consensus Estimates for the first quarter and fiscal 2013 are $1.01 and $4.83 per share, respectively.

Let's Conclude

Target is persistently trying every means to keep afloat in an economy, which is still not completely awakened from the state of hibernation. 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 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 United States, poses a competitive threat to Target, compared with Wal-Mart Stores Inc. ( WMT ) and Costco Wholesale Corporation ( COST ), which are geographically diverse and more resourceful.

Currently, Target holds a Zacks Rank #3 (Hold). Another stock to be merited in the retail discount store chain sector is The TJX Companies, Inc. ( TJX ), which carries a Zacks Rank #2 (Buy).

COSTCO WHOLE CP (COST): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

TJX COS INC NEW (TJX): Free Stock Analysis Report

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

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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.

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