Tickers in this Article: TGT, WMT, V, JWN, SHLD
Back when the economy was humming along and consumers spent freely, big-box retailer Target (NYSE:TGT) was commended for a focus on affordable fashion in apparel and housewares. In recent times, this focus has turned from blessing to curse, and although industry conditions are improving, Target's arch rival still looks better positioned from an investment standpoint. IN PICTURES: How To Make Your First $1 Million

Third-Quarter Results
Total sales improved 1.1% to $15.3 billion as sales in the flagship store retail operations, which accounted for 96.8% of total sales, grew 1.4% on the back of new store expansion. Unfortunately, this gain was offset by negative 1.6% comparable store sales. In similar fashion to upscale rival Nordstrom (NYSE:JWN), Target runs its credit card operations in-house and also happens to issue a Visa (NYSE:V) brand card. Revenues in this segment fell 7.5% to account for the remainder of total sales as net write-offs from loans to customers gone bad of $280 million. This was compounded by management targets and allowance for doubtful accounts, which saw a slight uptick to $1.03 million.

Management stated that it was "very pleased with Target's performance in the third quarter, which exceeded our expectations and was the result of responsible planning and consistent execution of our strategy by teams across the company." This was in stark contrast to Sears (Nasdaq:SHLD), which continues to see sales and profits plummet, and was evident in Target's expense management as cost of sales and SG&A expenses grew at a lower rate than sales and lower credit card expenses served to collectively boost operating income 0.9% to $874 million. A lower tax rate served to boost net earnings more than 18.4% as earnings per diluted share came in at 58 cents - ahead of what analysts were expecting.

Visibility on the sales front and in Target's credit card portfolio is improving and Target said it was comfortable with fourth-quarter analyst profit projections of $1.12 per share. For the full year, analysts currently expect earnings of $3.13 per share and modest 0.4% sales growth to just over $65 billion.

Bottom Line
Based on current full-year estimates, shares of Target are trading at a forward P/E multiple of 15.3. This is slightly above arch rival Wal-Mart (NYSE:WMT), which is currently trading at a forward P/E of 14.9. Wal-Mart will also post 0.8% positive sales growth for the full year, or about double that of Target. Wal-Mart also has a better track record at generating excess capital, which it uses to fund a 2.1% dividend yield (versus Target's 1.4% yield) and repurchase shares. In recent years, the vast majority of Target's operating cash flow has gone back into maintaining and growing its store base. At the current valuation and based on its more efficient capital generation and allocation track record, Wal-Mart looks to be the more compelling investment. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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