Targeting Good Results
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Target Corporation (NYSE: TGT) has established somewhat of a niche in the retail industry. The company is expanding its stores that offer fresh produce, and is generally well-regarded when it comes to both fashion and home goods. In addition, the company usually leaves its primary aisles clear for customers, versus its competitor Wal-Mart (NYSE: WMT) who normally places displays in the middle of the main walkways to squeeze more selling space out of each store. While these displays do offer more selling space, customers many times complain that the stores feel cramped. While it's true that online competition such as Amazon.com (NASDAQ: AMZN) presents a challenge, Target is taking steps to insulate itself.
In the company's most recent earnings report, Target showed respectable sales and earnings growth while investing for the future. The company's overall adjusted EPS grew 4.6%, driven by United States results, and offset by investments for the planned expansion into the Canadian market. In the U.S., sales increased 3.5% driven by a 3.1% increase in comparable store sales. The company's earnings before interest and taxes increased 2.9%. Target's U.S. credit card segment reported average receivables down 5%, and because of lower interest rates the company's spread dropped to 9.5% compared to 12% last year. One reason the company's results were not more impressive was, the $69 million worth of loss reported connected to the expected Canadian market entry in 2013. While this investment should pay off in the long run, it hurt earnings results. However, the company is making some changes to their store format that should benefit earnings going forward.
Two Growth Opportunities
Investors can see some of the financial steps that Target is taking to improve results in the future. The company is aggressively repurchasing shares, and in the current quarter retired 9.6 million shares at an average price of $57.09. On a year-over-year basis, the diluted share count is down 3.2%. What was impressive also is, the company generated over $860 million worth of free cash flow and paid out just under $400 million in dividends. With this 45.97% free cash flow payout ratio, Target has the funds to continue to invest in the expansion of their existing store base and explore new opportunities.
While the company is not opening very many stores in the United States, one new growth avenue that the company is testing out is the CityTarget concept. For those who don't know, CityTarget is a smaller format designed for dense urban areas with a, “uniquely tailored assortment of goods.” This concept may allow the company to penetrate communities that otherwise would have been off-limits. A second change that Target has been making is, to expand the food assortment at their existing domestic locations. In the last year, the number of locations offering this expanded assortment has increased from 56.07% to 75.68%. It seems very likely that the company's aim is to offer this more grocery-like shopping experience at all of their domestic stores. These new growth avenues should help Target to attain analyst's longer-term expectations of double-digit earnings growth.
I've read many articles saying that Amazon in particular, is a major threat to the survivability of big-box retailers. However, what this theory seems to be missing is the fact that Amazon only truly competes with about half of Target or Wal-Mart's business. Customers may choose to purchase electronics and general merchandise through Amazon rather than these big box stores, but what Amazon does not do is offer most grocery items, pharmacy services, and the same home goods or fashion shopping experience. The uncomfortable truth for Amazon is, many customers are not comfortable purchasing grocery items online. There are multiple reasons, first is customers like to be able to see the item they're receiving. In addition, fresh produce and meats are almost the exclusive domain of traditional grocers. This is not something that's likely to change anytime soon. Also, for many people purchasing clothing requires trying them on. This is why Target in particular has been successful with clothing sales, while Amazon competes more effectively on electronics and other types of merchandise.
Long story short, Target has multiple growth opportunities in front of it and offers a shopping experience that its customers enjoy. Where the stock is concerned, Target sells for a lower P/E ratio than any of the competitors we've mentioned. The company also sports the highest yield, as well as the highest gross margin. With Target just beginning its international expansion in 2013, it appears that the company still has decades of growth in front of it. Investors would be wise to not underestimate this company as their plans seem right on target.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.