Amidst the sluggish economic environment, cautious consumer spending and intense competition, Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, has maintained positive sales momentum so far in 2012, and we believe it will sustain the same tempo for the remainder of the year.
Riding Positive Comps
During the period from January to July 2012, Target consistently registered comparable-store sales growth. In that period, comps growth touched a low of 1.1% and hit a high of 7.3%, recording average growth of approximately 4.2%. In the first seven months of 2012, comps increased 4.3% in January, 7% in February, 7.3% in March, 1.1% in April, 4.4% in May, 2.1% in June and 3.1% in July.
Given an uneven economic recovery, monthly sales data for Target portrays a decent performance. From January to July of this year, the company registered minimum sales growth of 2.1% and maximum growth of 8%, reflecting average growth of approximately 4.8% for the period. It registered sales growth of 5.1% in January, 8% in February, 7.9% in March, 2.1% in April, 5% in May, 2.6% in June and 3.2% in July.
Conclusions
Target’s relentless endeavors to keep itself on a growth trajectory have paid off despite a difficult consumer environment. The company’s P-fresh remodel program, 5% REDcard Rewards program, City Target stores, The Shops at Target initiatives and its foray into foreign markets have all helped to drive solid top-line growth this year.
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 more focus on consumable items should boost sales and earnings in a sluggish consumer environment. The company’s long-term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017.
The economy has not yet recovered fully. It is evident that the company’s customers remain sensitive to macroeconomic factors including increases 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.
Moreover, a greater concentration of the company’s revenue generating capabilities in limited regions of the United States poses a competitive threat to Target, compared with Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), which are more geographically diverse.
Consequently, Target is focusing more on store renovations and improving store sales productivity. Further, with the ever-changing consumer preferences, the company feels the need to adapt to the demands of time and consider consumer-oriented strategies.
Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Target retains a Zacks #2 Rank that translates into a short-term “Buy” rating.
The company delivered quarterly earnings of $1.06 per share that rose 3.4% from $1.03 earned in the prior-year quarter, and also came in ahead of the Zacks Consensus Estimate of $1.01. However, excluding costs related to Canadian operations, earnings from its U.S. operations came in at $1.12 per share, up 4.6% from $1.07 posted in the year-ago quarter.
Target now projects adjusted third-quarter 2012 earnings between 83 cents and 93 cents a share. For fiscal 2012, earnings are expected to be in the range of $4.65 to $4.85 per share, up from $4.60 to $4.80 forecasted earlier.
On a GAAP basis, including expenses related to the company’s entry in the Canadian market, management projected earnings between 69 cents and 79 cents for the third quarter and between $4.20 and $4.40 per share for fiscal 2012, up from $4.10 and $4.30 projected previously.
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