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Store Improvements Driving Target's Upside
Big-box retailer Target's (NYSE:TGT) third quarter showed a continued improvement in sales as the industry thaws from the downturn brought on by the credit crisis. Lower credit card losses really boosted profit trends, and there are a number of incremental store developments that should allow sales and earnings to steadily increase going forward.
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Third-Quarter Review
Retail sales grew 3% and reached $15.2 billion for the quarter. An interesting statistic is that sales were 15% of the $101.2 billion that rival Wal-Mart (NYSE:WMT) posted during its third quarter, which demonstrates just how much larger Wal-Mart is. A clearer comparison given that Target operates exclusively in the U.S, Wal-Mart's U.S. sales at its namesake stores exceeded $62 billion, meaning it is four times larger.
Despite its smaller size, Target is outperforming Wal-Mart from a same-store sales perspective and it reported positive third-quarter comparable sales of 1.6%. Wal-Mart logged a slight comp decline. Target, along with upscale retail rival Nordstrom (NYSE:JWN), runs an in-house credit card portfolio that reported a 22% decline in revenue to $379 million, or a very small part of overall sales.
Credit card profits are high and brought in $130 million as bad debt expense fell 64%. Retail operating income reached $816 million and grew 3.2% on a year-over-year basis. Overall, cost controls helped push operating margins ahead to 5.4% of sales. The end result was a 22.6% jump in net income to $535 million, or 74 cents per diluted share. This came in ahead of analyst projections.
Outlook
Analysts currently expect full-year sales growth of just under 4% and for total sales to reach nearly $68 billion. Earnings expectations call for $3.89 in per-share profit, which would represent a year-over-year growth rate of more than 17%.
Target Valuation
Given the current projections, shares of Target trade at a forward P/E slightly under 13. During the last full year period, free cash flow was about $5.50 per diluted share and means the trailing free cash flow multiple is even more reasonable at around 10.
Target's stock is currently bumping up against its highs for the year, but there is reason to believe it could go higher over time. Target should continue to outperform rival Wal-Mart and the namesake and K-Mart franchises of Sears Holdings (Nasdaq:SHLD), if shoppers are starting to again emphasize brands and fashion in addition to price.
Bottom Line
A loyalty credit card that offers 5% discounts could also boost sales and keep customers coming back. The across-the-board product discount also beats loyalty cards from the likes of Kroger (NYSE:KR) that offer it only on certain goods. Finally, Target is emphasizing grocery items, which should also drive traffic growth. (For related reading, take a look at Analyzing Retail Stocks.)
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IN PICTURES: 4 Biggest Investor Errors
Third-Quarter Review
Retail sales grew 3% and reached $15.2 billion for the quarter. An interesting statistic is that sales were 15% of the $101.2 billion that rival Wal-Mart (NYSE:WMT) posted during its third quarter, which demonstrates just how much larger Wal-Mart is. A clearer comparison given that Target operates exclusively in the U.S, Wal-Mart's U.S. sales at its namesake stores exceeded $62 billion, meaning it is four times larger.
Despite its smaller size, Target is outperforming Wal-Mart from a same-store sales perspective and it reported positive third-quarter comparable sales of 1.6%. Wal-Mart logged a slight comp decline. Target, along with upscale retail rival Nordstrom (NYSE:JWN), runs an in-house credit card portfolio that reported a 22% decline in revenue to $379 million, or a very small part of overall sales.
Credit card profits are high and brought in $130 million as bad debt expense fell 64%. Retail operating income reached $816 million and grew 3.2% on a year-over-year basis. Overall, cost controls helped push operating margins ahead to 5.4% of sales. The end result was a 22.6% jump in net income to $535 million, or 74 cents per diluted share. This came in ahead of analyst projections.
Analysts currently expect full-year sales growth of just under 4% and for total sales to reach nearly $68 billion. Earnings expectations call for $3.89 in per-share profit, which would represent a year-over-year growth rate of more than 17%.
Target Valuation
Given the current projections, shares of Target trade at a forward P/E slightly under 13. During the last full year period, free cash flow was about $5.50 per diluted share and means the trailing free cash flow multiple is even more reasonable at around 10.
Target's stock is currently bumping up against its highs for the year, but there is reason to believe it could go higher over time. Target should continue to outperform rival Wal-Mart and the namesake and K-Mart franchises of Sears Holdings (Nasdaq:SHLD), if shoppers are starting to again emphasize brands and fashion in addition to price.
Bottom Line
A loyalty credit card that offers 5% discounts could also boost sales and keep customers coming back. The across-the-board product discount also beats loyalty cards from the likes of Kroger (NYSE:KR) that offer it only on certain goods. Finally, Target is emphasizing grocery items, which should also drive traffic growth. (For related reading, take a look at Analyzing Retail Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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