Risk Reward Balances Target

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The U.S. economy is still grappling with an uneven recovery, and companies are striving to shield themselves from the financial turmoil. Target Corporation (TGT) is persistently trying to keep itself afloat in this sluggish economic environment. The company’s P-fresh remodel program, 5% REDcard Rewards program, CityTarget stores and its foray into the foreign market are essential for safeguarding itself from any unprecedented events.

Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that increased focus on consumable items should boost sales and earnings in a soft consumer environment. The company’s long-term objective is to attain earnings per share of $7.20 or more in the U.S. by 2017. Target now projects fourth-quarter 2012 earnings between $1.45 and $1.55 for the quarter.

The company is now focusing more on store renovations and improving store sales productivity. Target plans to sustain its remodeling program at existing general merchandise locations, which include an expanded grocery offering, improved store layout and enhancement of in-store shopping experience across departments, such as apparel, home, beauty, shoes and baby.

In order to tap the urban markets where real estate remains a constraint, Target plans to introduce smaller-format stores called CityTarget, similar to its biggest rival, Wal-Mart Stores Inc. (WMT). Target is now operating 5 CityTarget stores in Los Angeles, Seattle, Chicago and San Francisco, and plans to open 3 more outlets in 2013.

The greater concentration of the company’s revenue generating capabilities in limited regions of the United States, pose a competitive threat to Target, compared with Wal-Mart and Costco Wholesale Corporation (COST), which are geographically diversified and more resourceful. Moreover, Target’s success rides on the stability of these particular regions.

Consequently, Target is eyeing store openings in international markets, such as Canada and Latin America. We believe, the opening of stores outside the United States will definitely boost the company’s top and bottom lines and improve cash flow generation capability.

The economy is still not out of the woods. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.

The above analysis supports our unbiased view on the stock, and therefore, we advocate our long-term “Neutral” recommendation on the stock. Moreover, Target retains a Zacks #3 Rank that translates into a short-term “Hold” rating.

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