Target Worth $62, Stock Edges Higher on Solid Results

TGT: Target logo

Target (NYSE:TGT) reported an approximately 5% fall in Q4 profits owing to the holiday discounts to drive sales. Other retailers like Wal-Mart (NYSE:WMT) also followed a similar strategy to induce buyers to spend which had a positive impact on customer traffic; however, this affected the retailers’ bottom line numbers. In order to stay competitive in the retail industry, it has become essential for retailers to follow persuasive selling strategies. Online retailers like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) are taking share from brick and mortar retailers like Wal-Mart, Best Buy (NYSE:BBY), Macy’s (NYSE:M), Sears (NASDAQ:SHLD), and Costco (NASDAQ:COST).

We have a revised price estimate of $62 for Target, implying a premium to the current market price. We have lowered our store count and capex estimate for 2012 in line with company guidance and also adjusted our numbers in accordance with the latest earnings release.

See our complete analysis for Target here

Growth drivers

  • Target’s PFresh remodels and 5% REDcard Rewards loyalty program were the major drivers of growth and helped in maintaining positive traffic and growing comparable store sales. The REDcard program witnessed an impressive increase in penetration from 5.9% to 9.3% yoy.
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Key highlights

  • Target’s full year outlook for 2012 was above analyst estimates. Investors responded positively to this as share prices edged higher on the day of earnings release.
  • Target plans to open 15-20 stores in 2012 including 5 CityTarget stores which will begin opening in July. These smaller format stores are targeted at urban customers and are expected to open in Chicago, Los Angeles and New York.
  • Target confirmed that it intends to sell off its credit card receivables portfolio but has suspended the efforts for now and is more inclined to do the transaction on appropriate terms.
  • Target plans to slow down P-fresh expansion in 2012. According to CEO Gregg Steinhafel, Target plans to convert 230 stores to the format in 2012, down from 413 last year. [1] Gregg asserted that it does not indicate any shift in their strategy and P-fresh format has been a major driving force behind grocery sales.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. See: Target To Slow Down P-fresh Expansion After Weak Q4, KamCity []