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Shares of Target (TGT) ended the week with very modest gains of 0.8%. The retailer announced its third quarter results on Thursday.

Third Quarter Results

Target reported third quarter revenues of $16.9 billion, up 3.2% on the year. Sales were driven by a 2.9% increase in comparable sales.

The company reported operating income before taxes of $1.16 billion, up 10% on the year. The company net earned $637 million, or $0.96 per diluted share. Earnings were driven by a $156 million gain related to the sale of credit-card receivables.

Adjusted earnings per share were up four cents to $0.90 per share. Excluding the $96 million start-up expenses in Canada, earnings came in at $0.77 per share, missing analysts consensus by two pennies.

Gross margins fell by 20 basis points to 30.3% as a result of the growth strategies. Operating income margin remained unchanged at 5.8%.

The contribution from the credit card division was under pressure as revenues fell 5.8% to $328 million. Average receivables were down 4.7% on the year to $5.8 billion. Furthermore, the spread against Libor fell 90 basis points to 9.3%.

During the quarter, Target repurchased roughly 1.7 million shares for a total consideration of $104 million, marking year to date repurchases of $1.25 billion.

CEO and Chairman Gregg Steinhafel commented on the results, "We're pleased with Target's third quarter financial performance, which reflects superb execution across each of our business segments. We are well-positioned to deliver strong fourth quarter performance by offering compelling merchandise and unbeatable value through initiatives like the Marcus Holiday Collection, 5% REDcard Rewards and our new Holiday Price Match which allow our guests to shop at Target with confidence throughout the holiday season."

Outlook

For the fourth quarter of its fiscal 2012, Target expects to report adjusted earnings per share of $1.64 to $1.74.

GAAP earnings per share are expected to come in between $1.45 and $1.55 per share as it reflects estimated $0.19 per share expenses related to the market entry in Canada. Analysts expected Target to guide for fourth quarter earnings of $1.50 per share.

Valuation

Target ended its third quarter with $1.5 billion in cash, equivalents and short term investments. The company operates with $18.5 billion in short and long term debt, for a net debt position of $17 billion.

For the first nine months of 2012, Target generated revenues of $50.6 billion. The company net earned $2.04 billion, or $3.06 per diluted share. At this rate, the company is on track to generate revenues around $73 billion for its full year of 2012. The company expects to earn around $3 billion or roughly $4.55 per share.

The market currently values Target at $41 billion. Based on the full year outlook, this values the firm at 0.6 times annual revenues and 13-14 times annual earnings.

Target currently pays a quarterly dividend of $0.36 per share, for an annual dividend yield of 2.3%.

Investment Thesis

Year to date, shares of Target have risen some 22%. Shares advanced from $50 in January to reach year highs of $66 in September. Shares are currently exchanging hands at $62.50 per share.

Shares set all time highs of $70 in 2007 before falling back to $25 in 2009. From that point in time, recovered to levels around $62 at the moment. Between 2008 and 2012, Target increased annual revenues from $65 billion to an estimated $73 billion. Net income advanced from $2.2 billion to an expected $3.0 billion this year. The company retired approximately 15% of its shares outstanding during the time period, thereby accelerating earnings per share growth.

Target had a decent quarter with 2.9% comparable sales growth. Store traffic was up a mere 0.5%, while pricing and increased volumes each added 1.2% in revenues. The company operated some 1,781 stores at the end of the quarter, including 5 brand new CityTarget stores.

The company is furthermore attempting to boost loyalty among consumers by its REDcards. The card had a 14% penetration during the quarter.

The company remains on track to generate annual revenues of $100 billion by 2017, and earn over $8 per share in that year. This implies an annual revenue growth target of 6.5%. The company targets for annual EPS growth of 12.0% during the period between 2012 and 2017.

Shares are fairly valued but I see few triggers at these levels. The long term growth plans are ambitious and shares deserve a higher valuation if Target is able to execute according to plan. On the other hand, the company carries a sizable debt position along.

Shares offer little value in the short run, but do remain an interesting long term pick as long as Target remains on track with its ambitious 2017 plans.

Source: Target - Company Remains On Track With Its 2017 Targets