Target’s Earnings Soar

Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted fourth-quarter 2010 results. The quarterly earnings of $1.45 per share beat the Zacks Consensus Estimate of $1.40, and rose 17% from $1.24 earned in the prior-year quarter.

The Zacks Consensus Estimate for the quarter was stable prior to the earnings release, despite 3 out of 26 analysts covering the stock lowering their projections in the last 30 days.

The increase in quarterly earnings was driven by effective cost management and improved profitability at retail and credit card segments that overshadowed lower-than-expected sales. Moreover, lower-than-expected effective tax rate boosted the quarterly earnings by 7 cents a share.

Behind the Headline

Total revenue for the quarter climbed 2.4% to $20,661 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $20,839 million. Retail sales grew 2.8% to $20,277 million as shoppers are gradually opening up their wallets.

Minneapolis, Minnesotabased company, Target, said that comparable-store sales for the quarter grew 2.4%, reflecting a sharp rise over an increase of 0.6% registered in the prior-year quarter. The number of transactions rose to 1.6%, whereas the average transaction amount climbed marginally by 0.8% in the quarter.

Despite a 3.4% increase in cost of sales, gross profit at the Retail segment climbed 1.4% to $5,819 million, aided by sales growth witnessed across the segment; however, gross margin contracted slightly by 40 basis points to 28.7%. Segment operating income jumped 3.1% to $1,608 million, whereas operating margin remained flat at 7.9%.

The company said that revenue from the Credit Card segment tumbled 17% to $384 million. However, Target was quick to indicate that segment profit rose to $151 million in the quarter under review from $39 million delivered in the prior-year quarter helped by a decline in bad debt expenses.

Target’s Strategic Initiatives

Management indicated that Target’s store remodel program, 5% REDcard Rewards program and the new platform will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience in fiscal 2011.

Earlier, Target had hinted about its plans to remodel nearly 380 stores in fiscal 2011, 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.

Moreover, by the end of 2011, Target plans to introduce P-fresh in-store food and grocery sections in approximately 850 discount stores. The company expects P-fresh to boost 2011 comparable-store sales by 1% to 2%.

Another opportunity, which Target is eyeing, is the opening of stores in international markets, such as Canada and Latin America. The company plans to open 100 to 150 stores in Canada by 2013 and 2014. We believe the opening of stores outside the United States will definitely boost the company’s top and bottom lines and improve its cash flow generation capability.

Other Financial Details

During the quarter, Target repurchased about 7.6 million shares at a price of $54.60 per share, aggregating $414 million. In fiscal 2010, the company bought back 47.8 million shares at a price of $52.44 per share, aggregating $2.5 billion.

The company ended the quarter with cash and cash equivalents of $1,712 million, total unsecured debt and other borrowings of $11,653 million and shareholders’ equity of $15,487 million.

Target currently, operates 1,750 stores in 49 states, of which 1,037 are general merchandise stores, 462 are expanded grocery assortment and 251 are SuperTarget stores.

Our View

Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy 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.

Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in the international markets.

The greater concentration of Target’s revenue generating capability in a few regions of the United States, poses a competitive threat, compared to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), who are geographically more diversified and more resourceful.

Consequently, we prefer to have a long-term ‘Neutral’ rating on the stock. However, Target holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

TARGET CORP (TGT): Free Stock Analysis Report

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