Target Hits and Misses the Bullseye

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Let me get this straight, to get the Target (NYSE: TGT) digital deals through Cartwheel by Target, its new initiative with Facebook in beta, these are the hoops I have to jump through:

1. Sign in to the Target Cartwheel site

2. Log on to Facebook

3. Scroll through hundreds of deals (700 now-may expand to 1,000)

4. Print out or scan the coupon codes on a smart phone

5. Go to the physical store

6. Find the items

7. Check out with the mobile or printed coupons.

While I can see that Target may receive some benefit from access to my Facebook friends and letting them know the deals I'm getting, I don't see that this is beneficial to me or the casual shopper. Most of the deals were for no more than 10% off. A rare few were for 30% off. My momma didn't raise me to pay retail and waste my time on ho-hum deals. Note: while in beta you're limited to 10 deals.

Does this move the needle?

I think not. Cartwheel may not make it past beta. It's more of a pain than Safeway's just for U online savings, which doesn't require printing out anything or scanning on smartphones; deals automatically load on a loyalty card. I think this is a rare stumble on their part. I give Target points for trying, but this is no Amazon or Wal-Mart (NYSE: WMT) killer.

To their credit Target now has free Wi-Fi in all stores and their e-commerce and mobile sales are outpacing big box competitors. As CEO Gregg Steinhafel said on the Q4 call in February, "We're very pleased with fourth quarter sales in our digital channels, as online and mobile sales grew faster than industry averages. As a result of our efforts to improve the website throughout 2012, key performance metrics are meaningfully improved, and our mobile sales and traffic are
growing at a triple digit pace off a much smaller base."

It has also entered into a consortium of big retailers, including rival Wal-Mart, for their own mobile wallet payment plan to rival Square and eBay's PayPal.

In other good news for Target, it announced a new fashion collaboration that all the fashionistas are drooling about on their blogs; in the fall a Phillip Lim line will debut at Target. Most of his designs will cost 50-90% less than their regular retail price.

Although the Target holiday collaboration with Neiman-Marcus was quite the dud, recent collaborations this year with apparel designers Kate Young and Prabal Gurung and celebrity Justin Timberlake have done well.

Target will have opened 24 stores in western Canada by the time you read this with plans for 100 more in Canada to open in time for the Christmas holiday season. Management expects this to be a growth driver as new stores continue opening.

The last big news for the company is that the five City Target stores, in bigger cities across the US, which are smaller than the typical Target and whose merchandise is more targeted for urban dweller, has been quite the success, leading Fast Company magazine to include Target in its top ten list of most innovative companies.

The behemoths of big box

Despite what I think will be a disappointment by Cartwheel, Target is a better buy than Wal-Mart. Wal-Mart may be much larger than Target and a more global brand with pricing power and is well-known as a tough negotiator with suppliers, but Target is a shrewd negotiator, too. Target has also differentiated itself as a more stylish place to shop for virtually the same price points.

The company is reporting Q1 results on May 22 and has preannounced that comparable same store sales will be flat and that adjusted EPS will be lower than previously guided range of $1.10-$1.20. No earnings surprises are likely. The company will probably announce a $2.1 billion share buyback as it was presented at the CIBC Retail& Consumer Conference.

The company pays a 2% dividend and that dividend, split adjusted, has grown every year since 1967. Analysts are relatively bullish on Target with 6 strong buys, 8 buys, 10 holds, and 1 underperform. Sales per square foot have been growing from the low of $287 in 2008 to $299 for 2012 but have yet to return to the high of $318 per square foot of 2007.

Target is trading at a 15.43 P/E and a 1.29 PEG. Wal-Mart is trading at a 15.72 with a 2.40% yield and a 1.56 PEG. Wal-Mart operates 10,773 stores in 27 countries with 2.2 million employees. In comparison Target has 1,800 stores in the US and Canada and 361,000 employees.

Target wins on valuation and growth with a lower forward P/E of 12.61 to Wal-Mart's 13.42. It also has much more room to expand and many more cities that would like a City Target in their downtowns.

If the reason you aren't interested in Wal-Mart is the continuing treatment of employees, cutting hours so benefits don't have to be paid and similar issues, an alternative could be Costco Wholesale (NASDAQ: COST). Costco's employees enjoy better benefits and pay than at most retailers and the company has less employee turnover, thanks to co-founder Jim Sinegal's foresight.

Costco is a membership warehouse concept which charges under $100 a year for the chance to take advantage of their deals which range from the most mundane, like pet food, to the sublime, authenticated fine art. It is the smallest of these three with 614 warehouses mostly in the US.

Costco is more pricey on valuation at 24.52 and only a 1.10% yield, but RW Baird reiterated its Outperform on May 9 citing domestic growth, stronger membership numbers, and increasing traffic, giving it a price target of $117. It has proportionally less debt than Target and Wal-Mart.

Who hits the mark?

Costco is a viable alternative to both but Target is the most innovative and best value of the three. Wal-Mart is a stock I personally wouldn't buy since I wouldn't shop there. That shouldn't stop you, if you disagree, but Wal-Mart has too much headline risk to my liking.

Target is a name that rarely misses the mark but keeps trying new things like designer collaborations and free Wi-Fi and I admire that in a company.

Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.



AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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