Target Hits the Bull’s Eye in the Second Quarter

“Target better than expected 79 cents a share and analysts were looking for only 66 cents. The revenue when you include credit cards was right in line with expectations and $15.1 billion and although same-store sales, sales of stores opened at least a year were down about 6%. Investors did really seem to like the results with regard to expectations and the target price up. There you see it above $43 in pre-market trading, 20% higher for the year.”– Fox Business Network 8/18/2009

Target Corp. (NYSE:TGT) greatly exceeded analysts estimates for the second quarter net income which came in at $594 million for the quarter. Net income fell $40 million from the period a year ago, but again that was less than expected. The second largest discount retailer saw revenue come in about where analysts expected, but strict adherence to cost management helped boost the bottom line. Sales in the retail unit fell about 2.7%, thanks to opening 23 new stores, but the more critical measure of same store sales declined 6.2%. Management said that they were not surprised by the declines in same store sales, especially since month same store sales results were down 5.2% in June and 6.5% in July.

One of the biggest story lines of the last few months has been the proxy battle waged by Bill Ackman and his firm Pershing Square Capital Management. Remember in May, Ackman tried to insert himself and a few others on the Target board of directors, but Target management prevailed getting all four of their board members reappointed (Ackman Missed His Target).

The tension between Ackman and the Target board arose over disagreements over the handling of Target’s real estate, and more so over Ackman’s concerns over the risk in Target’s credit card business. In this quarter, management said that credit-card portfolio showed improving risk trends, and the unit’s performance hit expectations with revenue of about $500 million. Nonetheless, Ackman and his firm lessened their stake in the retailer to 4.4% from 7.8%. Interestingly, he has actually increased the amount of common stock held in order to gain a little more voting power.

One the whole, we think that this quarter was a successful one for Target. The stock is up about 7% in mid-morning trading, but we still believe that there is appreciation potential left in these shares. Based on the company’s current fundamentals we believe that over the long term the stock should trade in the range of $50 to $64. For example, on a price-to-sales basis, over the last ten years Target has traded for between .64x and 1.01x, but the stock is currently trading at only .47 times revenue per share. TGT stock looks similarly undervalued on a price-to-cash earnings basis as well. With improvement in the credit card unit, one of the primary concerns is lessened, and now Target should focus on driving sales improvements. We are encouraged by the performance in the last quarter and we are confident to reaffirm our Undervalued stance.

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