Target Corporation’s (TGT) efficient marketing, multi-channel strategy, product innovation, compelling pricing, and new merchandise assortments should help 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 recently posted second-quarter 2010 quarterly earnings of 92 cents a share, in line with the Zacks Consensus Estimate but up 17% from 79 cents delivered in the prior-year quarter.
Going forward, the company will focus more on store renovations and improving store sales. Target will spend about $1 billion to remodel nearly 340 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, with an aim to increase traffic.
However, the recent economic downturn has dampened shopping spirits. Consumers grappling with the recession and with a lower disposable income have been prioritizing purchases. They now focus more on consumables, which usually carry lower gross margins than discretionary items.
Moreover, the greater concentration of the company’s revenue generating capabilities in limited regions of the United States poses a competitive threat to Target compared to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), who are geographically diversified and more resourceful. Moreover, Target’s success rides on the stability of this particular region.
We believe, the openings of stores outside the United States will definitely boost the company’s top and bottom lines and improve cash flow generation capability.
Given the pros and cons, we prefer a Neutral rating on the stock with a target price of $53.00. Moreover, our Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, correlates with our long-term recommendation.