Target has long been one of my favorite retailers and places to shop. Lately, over the last couple of years, they have been renovating their stores and I have to say they look great! As a company, they probably do not require much of an introduction. Target was incorporated in Minnesota in 1902, became a public company in 1967 and, as of January 2012, have 1,764 stores, with 251 of them as Supercenters, spread out across 49 states and the District of Columbia. Let's take a little mini-tour...
Their new carts are both more easily maneuverable than what they had before, and Shopping-Spree-Barbie fabulous. There is only one annoyance with them in that, when it rains, they retain a whole lot more water than the old decrepit wire frame carts that they still have at Walmart, and it looks like all that extra water might be annoying some of their customers a bit. Anyone else notice this? Hopefully, Target will soon figure this out and put some sort of remedy in place.
Their selection in apparel is fantastic, a million times better than Walmart, with very reasonable prices for the level of quality. However, it would be exciting if they went just a bit farther as far as bringing more variety, but the selection that they do offer is nice.
The employees are always so darn clean and energetic, and the attention that they give to the customer leaves Walmart in the dust. They generally seem to be of just one notch higher in caliber, and enjoy their jobs just a bit more, than workers in other comparable big-box retailers. This is a very difficult accomplishment for the business that they are in.
Slightly higher-end selection of food and, thankfully, their apples actually taste like apples and the celery doesn't have that bitter chemical taste.
A large section of Walmart's stores are dedicated to grocery, but their quality often makes cardboard appetizing by comparison, and they have been replacing common brand names with "Great Value" alternatives, thus steadily converting their aisles into this creepy shade of hospitalized white over the years.
However, as earnings grow for Walmart, and stock price has barely budged, they are increasingly becoming a "Great Value" for shareholders, but do you really want to take ownership in these overly-bland product aisles? In the end, this may be the better way to go. Either way, an understanding of Target helps with an understanding of WalMart, so lets carry on.
Target's Operational Expansion and Performance
Target currently has a total number of stores now at 1,763. This number has been increasing less rapidly in recent years, as they have been concentrating resources on updating their current general merchandise stores with an expanded food assortment. Retail square footage was growing by the mid-single digits until 2009, when they only expanded by .7% and .9% in 2010 and 2011. Meanwhile, as the general merchandise stores are converting, they are also beginning to lay the real estate framework for expansion into Canada with recent land deals.
So, Target stores will be expanding up into the polar fringes... then what? The U.S. has a population of 310 million supporting 1,763 stores, Canada has a population of about one-tenth of ours, so perhaps they can support 180 more stores. Currently, they are laying plans for 60. Beyond Canada, I am not so sure that their business model will work so successfully in Mexico, Europe, Asia, or anywhere else for that matter. For their sake, this might be a good thing that they stay close to home.
Walmart is off chasing store expansion into the far reaches of the planet, and all these countries are going to have completely different national systems and consumer tastes from one another. This can't be an easy task for them. So far, they have been navigating this well, but it must be putting some kind of extra strain on their managerial resources. Meanwhile, Target is staying right here where life is more understandable, and instead repurchasing a considerable number of shares with the cash flow generated.
Year Shares Outstanding, millions
2012 669.29
2011 704.04
2010 744.64
2009 752.71
2008 818.74
2007 859.77
2006 874.07
2005 890.64
2004 911.81
2003 909.80
Meanwhile, as sales have increased only marginally
Year Sales, in Billions
2012 69.87
2011 67.39
2010 65.36
2009 64.95
2008 63.37
2007 59.49
2006 52.62
2005 46.84
2004 42.03
2003 37.41
...earnings per share have increased at a far better pace...
Year EPS
2012 4.28
2011 4.00
2010 3.30
2009 2.86
2008 3.35
2007 3.21
2006 2.71
2005 2.07
2004 1.76
2003 1.50
...and dividends have increased along with it.
Year Div/share
2011 1.15
2010 .92
2009 .67
2008 .62
2007 .54
2006 .46
2005 .38
2004 .31
2003 .27
The current dividend yield is 2.47%. Not too much here to get excited about, but it has been increasing steadily for years and years, currently averaging a 20% yearly increase for the past five. The current PE ratio is at 13.44, shares outstanding have been decreasing at a CAGR of 3% per year. These make for some very worthwhile factors that give the share price a bit of "upward mobility."
However, considering how earnings decreased considerably in 2009 during the economic downturn, largely due to their credit card segment, as discussed below, it is difficult for me to ascertain within a comfortable range of certainty if they are of an "investable" value or not. Under such circumstances, it is best to presume that they are not because, after all, we can always get hit with another recession tomorrow. Such a thing would make any positive valuation as of today look horrible afterwards. When in doubt, throw it out. That aside, no effort is wasted in understanding the company, as this is when an investor comes to the inclination of when would be a good time to buy.
Credit card segment
When understanding Target, along with store operations, where the company is headed, and the basic aspects regarding financial evaluation — serious attention should be given to their credit card segment. Target provides company-branded credit cards to their customers, along with a discount on purchases, and they hold these credit accounts as an asset on their balance sheet. The fundamentals regarding this arrangement are paramount in understanding Target as a business.
Perhaps these accounts give them an operational advantage by rewarding customer loyalty, and make for some extra profits, but this also puts them in a slightly more vulnerable financial position from a recessionary perspective. Their credit portfolio is effectively functioning as a mechanism that provides an extra boost to earnings during good times, but then nibbles on their results from the increased write-offs during bad times.
Along with slight pressure to comparable store sales in 2008 and 2009, the additional write-offs to their credit portfolio, although not to the point of taking an overall lending loss, did take large part in kicking their earnings down during those years mentioned. This situation has long since stabilized, but it would be unwise for an investor not to expect such a thing to present itself again, and the stock price to react to this accordingly.
Balance Sheet
For the most recent quarterly from last April, Target has $675 million in cash, $5,548 million in credit card receivables (discussed above), $7,670 million in inventory, and $1,698 in other current assets, for a net sum of $15,591 in total current assets. When analyzing balance sheets, I am mostly inclined to look for anything that would count as a special "value prize" on one end, or something that could get a company into trouble on the other. They have $12,446 million in total current liabilities, nothing particularly concerning there, and then $13,467 million in debt. Their debt levels deserve an extra look but, as shown below, their interest rates are low and maturities are stretched out for many years into the future.
The amount of debt due before 2016 is $6,281 million, with $3,786 due within one year. Their historical cash flow statements for the previous five years, plus available cash on hand, should be more than sufficient to meet their obligations, granted that they do not get too heavy with capital expenditures. Nothing particularly disconcerting here either.
One Demerit for Executive Team - Salary Benchmarking
Target executive compensation is organized so that their salary is set at 75% of their selected peer group. This is a bit atrocious in that, for both good years and bad, they still end up getting pay raises. An investor brought this issue up as a shareholders' proposal on page 63 of their 2011 proxy statement. The request seems reasonable that their salary be brought down to the middle with their peer group.
The company doesn't have anything obvious going on that would be otherwise questionable, but something irked me a bit about their response to this proposal. This isn't a huge red alarm, or really that uncommon, but it gave me a bit of an impression that they have a dismissive attitude towards their investors. For example, one of the bullet points in opposition to the proposal was that the 75% benchmark was warranted because "their executive officer positions are more complex given the nature of their business." Really? Perhaps all their employees should then have their salaries adjusted accordingly. I hoped for another follow-up proposal in the 2012 proxy but, sadly, there was none. Oh well.
Overall
Aside from this minor annoyance with management, they still do run a neat, clean and profitable retail operation. The economic downturn of a few years ago did bring them some performance difficulties, but also an exaggerated discount to their share price. The value in purchasing may be lacking for now, but it might be worth putting them on the mental back burner as a great recessionary play some time in the future. The old saying "Buy on the sound of cannons, sell on the sound of trumpets" could very well apply here. The limited-growth nature to their business looks like it could ruin any benefit in holding on to them for an extended period beyond that.
Disclosure
This is not an investment recommendation but an analytical investigation into a company. Do not be silly enough to take anyone's perspective as infallible, certainly not mine, but make sure to do your own independent research and verification. I do not own shares in Target.
Their new carts are both more easily maneuverable than what they had before, and Shopping-Spree-Barbie fabulous. There is only one annoyance with them in that, when it rains, they retain a whole lot more water than the old decrepit wire frame carts that they still have at Walmart, and it looks like all that extra water might be annoying some of their customers a bit. Anyone else notice this? Hopefully, Target will soon figure this out and put some sort of remedy in place.
Their selection in apparel is fantastic, a million times better than Walmart, with very reasonable prices for the level of quality. However, it would be exciting if they went just a bit farther as far as bringing more variety, but the selection that they do offer is nice.
The employees are always so darn clean and energetic, and the attention that they give to the customer leaves Walmart in the dust. They generally seem to be of just one notch higher in caliber, and enjoy their jobs just a bit more, than workers in other comparable big-box retailers. This is a very difficult accomplishment for the business that they are in.
Slightly higher-end selection of food and, thankfully, their apples actually taste like apples and the celery doesn't have that bitter chemical taste.
A large section of Walmart's stores are dedicated to grocery, but their quality often makes cardboard appetizing by comparison, and they have been replacing common brand names with "Great Value" alternatives, thus steadily converting their aisles into this creepy shade of hospitalized white over the years.
However, as earnings grow for Walmart, and stock price has barely budged, they are increasingly becoming a "Great Value" for shareholders, but do you really want to take ownership in these overly-bland product aisles? In the end, this may be the better way to go. Either way, an understanding of Target helps with an understanding of WalMart, so lets carry on.
Target's Operational Expansion and Performance
Target currently has a total number of stores now at 1,763. This number has been increasing less rapidly in recent years, as they have been concentrating resources on updating their current general merchandise stores with an expanded food assortment. Retail square footage was growing by the mid-single digits until 2009, when they only expanded by .7% and .9% in 2010 and 2011. Meanwhile, as the general merchandise stores are converting, they are also beginning to lay the real estate framework for expansion into Canada with recent land deals.
So, Target stores will be expanding up into the polar fringes... then what? The U.S. has a population of 310 million supporting 1,763 stores, Canada has a population of about one-tenth of ours, so perhaps they can support 180 more stores. Currently, they are laying plans for 60. Beyond Canada, I am not so sure that their business model will work so successfully in Mexico, Europe, Asia, or anywhere else for that matter. For their sake, this might be a good thing that they stay close to home.
Walmart is off chasing store expansion into the far reaches of the planet, and all these countries are going to have completely different national systems and consumer tastes from one another. This can't be an easy task for them. So far, they have been navigating this well, but it must be putting some kind of extra strain on their managerial resources. Meanwhile, Target is staying right here where life is more understandable, and instead repurchasing a considerable number of shares with the cash flow generated.
Year Shares Outstanding, millions
2012 669.29
2011 704.04
2010 744.64
2009 752.71
2008 818.74
2007 859.77
2006 874.07
2005 890.64
2004 911.81
2003 909.80
Meanwhile, as sales have increased only marginally
Year Sales, in Billions
2012 69.87
2011 67.39
2010 65.36
2009 64.95
2008 63.37
2007 59.49
2006 52.62
2005 46.84
2004 42.03
2003 37.41
...earnings per share have increased at a far better pace...
Year EPS
2012 4.28
2011 4.00
2010 3.30
2009 2.86
2008 3.35
2007 3.21
2006 2.71
2005 2.07
2004 1.76
2003 1.50
...and dividends have increased along with it.
Year Div/share
2011 1.15
2010 .92
2009 .67
2008 .62
2007 .54
2006 .46
2005 .38
2004 .31
2003 .27
The current dividend yield is 2.47%. Not too much here to get excited about, but it has been increasing steadily for years and years, currently averaging a 20% yearly increase for the past five. The current PE ratio is at 13.44, shares outstanding have been decreasing at a CAGR of 3% per year. These make for some very worthwhile factors that give the share price a bit of "upward mobility."
However, considering how earnings decreased considerably in 2009 during the economic downturn, largely due to their credit card segment, as discussed below, it is difficult for me to ascertain within a comfortable range of certainty if they are of an "investable" value or not. Under such circumstances, it is best to presume that they are not because, after all, we can always get hit with another recession tomorrow. Such a thing would make any positive valuation as of today look horrible afterwards. When in doubt, throw it out. That aside, no effort is wasted in understanding the company, as this is when an investor comes to the inclination of when would be a good time to buy.
Credit card segment
When understanding Target, along with store operations, where the company is headed, and the basic aspects regarding financial evaluation — serious attention should be given to their credit card segment. Target provides company-branded credit cards to their customers, along with a discount on purchases, and they hold these credit accounts as an asset on their balance sheet. The fundamentals regarding this arrangement are paramount in understanding Target as a business.
Perhaps these accounts give them an operational advantage by rewarding customer loyalty, and make for some extra profits, but this also puts them in a slightly more vulnerable financial position from a recessionary perspective. Their credit portfolio is effectively functioning as a mechanism that provides an extra boost to earnings during good times, but then nibbles on their results from the increased write-offs during bad times.
Along with slight pressure to comparable store sales in 2008 and 2009, the additional write-offs to their credit portfolio, although not to the point of taking an overall lending loss, did take large part in kicking their earnings down during those years mentioned. This situation has long since stabilized, but it would be unwise for an investor not to expect such a thing to present itself again, and the stock price to react to this accordingly.
Balance Sheet
For the most recent quarterly from last April, Target has $675 million in cash, $5,548 million in credit card receivables (discussed above), $7,670 million in inventory, and $1,698 in other current assets, for a net sum of $15,591 in total current assets. When analyzing balance sheets, I am mostly inclined to look for anything that would count as a special "value prize" on one end, or something that could get a company into trouble on the other. They have $12,446 million in total current liabilities, nothing particularly concerning there, and then $13,467 million in debt. Their debt levels deserve an extra look but, as shown below, their interest rates are low and maturities are stretched out for many years into the future.
The amount of debt due before 2016 is $6,281 million, with $3,786 due within one year. Their historical cash flow statements for the previous five years, plus available cash on hand, should be more than sufficient to meet their obligations, granted that they do not get too heavy with capital expenditures. Nothing particularly disconcerting here either.
One Demerit for Executive Team - Salary Benchmarking
Target executive compensation is organized so that their salary is set at 75% of their selected peer group. This is a bit atrocious in that, for both good years and bad, they still end up getting pay raises. An investor brought this issue up as a shareholders' proposal on page 63 of their 2011 proxy statement. The request seems reasonable that their salary be brought down to the middle with their peer group.
The company doesn't have anything obvious going on that would be otherwise questionable, but something irked me a bit about their response to this proposal. This isn't a huge red alarm, or really that uncommon, but it gave me a bit of an impression that they have a dismissive attitude towards their investors. For example, one of the bullet points in opposition to the proposal was that the 75% benchmark was warranted because "their executive officer positions are more complex given the nature of their business." Really? Perhaps all their employees should then have their salaries adjusted accordingly. I hoped for another follow-up proposal in the 2012 proxy but, sadly, there was none. Oh well.
Overall
Aside from this minor annoyance with management, they still do run a neat, clean and profitable retail operation. The economic downturn of a few years ago did bring them some performance difficulties, but also an exaggerated discount to their share price. The value in purchasing may be lacking for now, but it might be worth putting them on the mental back burner as a great recessionary play some time in the future. The old saying "Buy on the sound of cannons, sell on the sound of trumpets" could very well apply here. The limited-growth nature to their business looks like it could ruin any benefit in holding on to them for an extended period beyond that.
Disclosure
This is not an investment recommendation but an analytical investigation into a company. Do not be silly enough to take anyone's perspective as infallible, certainly not mine, but make sure to do your own independent research and verification. I do not own shares in Target.
