Target Remains Strong; Posts Solid Second Quarter Results
RJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Minnesota based retailer Target (NYSE: TGT) reported strong second quarter results recently. Revenues for the retailing giant increased 3.3% year-over-year to $16.8 billion, driven by 3.1% same-store sales growth in the US. Meanwhile, earnings, on a non-GAAP basis, grew 4.6% year-over-year to $1.12 per share, slightly higher than consensus expectations. The firm also raised its non-GAAP earnings per share guidance to $4.65 – $4.80, from its previously announced range of $4.60 - $4.80.
The company continues to invest in building a Canadian business, as the typical suburban locations to build new Target stores are becoming harder to find. We like the company’s entry into the Canadian market because we think Canadians will be reasonably attracted to the store’s clean, organized format and efforts to win over the hearts of local communities. Target tends to be less of a nebulous corporation like competitor Wal-Mart (NYSE: WMT), which may also be why Target stores haven’t faced the same scrutiny while attempting to enter urban markets. For example, the firm recently opened up its first City Target locations in Chicago, Los Angeles and Seattle, and given the weakness we’ve seen from traditional grocers, we expect Target to continue to open in urban locations (and steal market share via lower prices and convenience).
Nevertheless, Wal-Mart is in a league of its own in terms of revenue. Ex-fuel, Sam’s Club same-store sales grew a steady 4.2%. We’re encouraged that Wal-Mart’s main driver of growth came from traffic increases because we think it means customers are returning to Wal-Mart after recently opting for the Dollar Trees and Dollar Generals of the world.
Target continues to work to improve its ecommerce platform, which posted no growth year-over-year. Management was excited about improved traffic online; however, our big issue is still website awareness. With a bevy of online retailers like Amazon (NASDAQ: AMZN) and eBay dominating traffic, we think Target.com isn’t high on the destination list of many shoppers. Still, the company has fantastic access to data via its REDcard rewards program, so increasing targeted marketing via email should help provide customers with useful buying opportunities. Fortunately for Target, its somewhat immune to Amazon's path of destruction. While Amazon's fulfillment centers are certainly becoming more capable of quick distribution, we don't think it has the scale, or interest, in entering the grocery business. In that sense, Target is relatively safe--for now.
Even though we thought results were strong, we aren’t huge fans of Target at current levels, as we believe shares are fairly valued. We’re anxious to see how stores will perform in Canada and think Target can take market share in the grocery market. The firm scores a 6 on the Valuentum Buying Index™, so we don’t think shares are very attractive at this time.
If Target were to fall below $60, our base-case scenario fair value estimate, we'd become interested, but if it fell below $48, we'd back up the truck.
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