Target Corporation (NYSE:TGT) is one of the largest retailers in the U.S. with over 1,800 stores. In fiscal 2013, the company expanded into Canada opening 124 locations. It also operates a fully integrated online business and issues its own consumer credit card, REDCard. The firm offers everyday essentials, fashion differentiated merchandise, and has recently incorporated a full assortment of food products in its large-format stores. Around 20% of its general merchandise is sold under private label. TGT focuses on delivering a differentiated shopping experience to its "guests" (customers), while offering them discount prices.
Expansion In and Out
Target has historically set its large-stores in limited regions of the U.S. However, being less geographically diversified than larger rivals, such as Wal-Mart (NYSE:WMT) and Cotsco Wholesale Corporation (NASDAQ:COST), poses a significant competitive threat. Having realized this, the company recently introduced smaller-format City Target stores. This initiative will allow the firm to adapt store format in order to penetrate thickly populated urban areas and cities thereby increasing sales. Also, it will close eight underperforming stores in the U.S. in May 2014.
- Warning! GuruFocus has detected 2 Warning Signs with TGT. Click here to check it out.
- TGT 15-Year Financial Data
- The intrinsic value of TGT
- Peter Lynch Chart of TGT
Target's recent expansion in the Canadian market is another important step for the company. Although the firm anticipated losses of $800 million from the Canadian division in 2013 (almost doubling its expected loss to $0.45 per share from $0.22 to $0.32), profitability from this segment is expected to improve greatly further on. With a decline in opening expenses, a better-adjusted inventory that avoids the need for markdowns, and revenues increasing in new stores, the company should be able to boost sales and cash flow generation.
Target is also focusing on improving store sales productivity in 100 stores in fiscal 2013. To this aim, it has undertaken a remodeling program which includes enhancing customers´ shopping experience in its different departments, enlarging its grocery offering and improving the general layout of its locations.
The company has set ambitious long-term goals and is fiercely facing competition in order to achieve them. It expects to grow at an annual rate of 3% to 4% over the next years, thus generating revenues for $85 billion in the U.S. by 2017. It also anticipates $6 billion revenue in Canada and earnings per share of $8.00 by the same year.
The Unpredictable Woe
Of course Target has seen better days. All of its recent growth initiatives have been overshadowed by the massive security breach that hacked the debit and credit card data of around 70 million customers. The company apologized and offered a year´s worth of credit monitoring to all of its guests. The information about the data breach came during the holiday, when retailers make the major part of the money. U.S. sales were thereby affected, and fourth quarter comps are expected to decline by 2.5%, resulting in 2% to 6% drop by the end of the fiscal year. Its share value also fell over 10% since the news was released. The impact, however, isn't expected to further affect Target's reputation given the high profile and sophistication of the breach of which the company was the main victim.
Facing headwinds, the company is strongly countering the downturn with multiple initiatives to drive important growth by 2017. Furthermore, the firm increased its annual dividend by 19.4% to $1.72 in June 2013 and expects it to increase to $3.00 per share by 2017. Target´s stock trades at 15.30 times its trailing earnings compared to the industry average of 18.80, and its return on equity showcases a healthy 18.10 compared to its rivals' 9.80. Investment guru James Barrow (Trades, Portfolio) recently increased his holdings by 12.2%. Considering the recent drop in its price, I feel Target is a good investment opportunity for those looking for long-term growth.
Disclosure: Vanina Egea holds no position in any stocks mentioned.