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The earnings release for Target (NYSE:TGT) has come as a new hope for the company. Although margins have shrunk for the company, its performance has been better than analyst estimates pushing the stock by 2% after the Q32012 earnings release. An EPS of 0.96 surpassed the consensus estimate of 0.79. The company recently guided next quarter EPS to be $1.69-$1.74 which is also above the analyst consensus of $1.51. The company believes that its EPS could have been greater by $0.13 this quarter, but its SG&A expense of $72 million for Canadian operations reduced the EPS to the current level.

Revenue of $16.92B came out to be quite close to the consensus of $16.93B; an increase by 89 BPS as compared to Q22012. Sell side expects revenue to grow by 33.85% in Q42012 which is almost double than the average of other competitors. This is mainly because of TGT's improved profits and sales through success in the RedCard.

Company

Revenue

EPS

Current Quarter (A)

Next Quarter (E)

Growth

Current Quarter

Next Quarter

Growth

WalMart (NYSE:WMT)

113.929

129.84

13.97%

1.08

1.59

47.22%

Costco Wholesale (NASDAQ:COST)

22.324

24.9

11.54%

0.89

1.07

20.22%

Target Corp

16.93

22.66

33.85%

0.96

1.51

57.29%

Competitors Average

12.5%

The gross margin has gone down by 2.7% (because of an increase in the cost of sold goods by 2.37%). However, this shrinking is less than analysts' estimates of 3%. The operating profit has shrunk by 19.68%, which is quite close to the consensus of 19%.

We see some hints of more conservative capital structure as the company has been able to reduce its debt-to-equity ratio from 96% to 89%. The company has sold its credit card receivables to TD bank. We believe that the company might be using this cash for debt servicing and buying back of shares from the market, which can be a positive sign for shareholders.

From a relative perspective, we feel the stock has some value for investors. If compared to its key rivals, Wal-Mart and Costco, the company has the lowest multiples in the industry, making it a fair prospect. A P/E of 12.7X and an EV/EBITDA of 7.68x is below the other two competitors.

A Relative Analysis Based on Multiples

Company

Trailing P/E

Forward P/E

PEG

P/S

EV/EBITDA

Wal-Mart

14.49

12.73

1.58

0.52

8.04

Costco Wholesale Corporation

24.27

18.78

1.70

0.42

10.24

Target Corp

14.31

12.69

1.19

0.56

7.68

Average

17.69

14.73

1.49

0.50

8.65

A comparison based on same-store sales (SSS) reveals that although TGT could not increase its SSS in Q32012 as much as it did in Q32011, its performance was better than WMT. It generated a growth in SSS by 2.9% which was mainly triggered by more growth in the average amount of transactions (2.4%). WMT, on the other hand, could only increase its SSS by 1.9%, which shows greater efficiency by TGT as shown in the following chart:

Company

SSS

Q32012

Q32011

Wal-Mart

1.90%

2.60%

Target Corp

2.90%

4.30%

Business Divers and Our Analysis:

We feel bullish about TGT because of an expectation of higher EPS and better revenue growth when compared to other competitors. Furthermore, we feel that there are some positive catalysts, which might be playing a great role in deciding the fate of the stock in the future. First, its effective pricing of toys makes it quite competitive to WMT. A survey by Citi reveals that TGT is one of the leaders in pricing and promotions for the coming holiday season and has beaten Amazon (NASDAQ:AMZN) in this regard. Although AMZN has become quite competitive through price reduction by 6.7%, it stills lags behind WMT and TGT.

TGT will lag behind WMT in discount offers if its special 5% discount factor is not applied. However, if the discount factor is applied, TGT will offer lower prices with 87% of the goods. This makes us feel that the company will be able to generate higher than expected revenues in the coming quarter.

Another advent which would be of significant importance is TGT's investment in music for the coming holidays. The company has managed exclusive partnerships with many key artists and diversified with Latin music, which is expected to generate significant traffic in the coming months. The company has also managed special apparel gifts under a special strategy, which will conclude at the end of December. The company hopes to get more customers through designs from Neiman Marcus. The company has also launched its own brand called Threshold and expects to do a good job through it in December.

However, we feel that a lot depends on its performance in the Canadian market where it plans to start in 2013. The company purchased 220 stores in Canada in 2011. The company plans to open 100-150 stores in 2013 and 2014. It has already spent $72 million for technology, innovation and renovation and therefore, high sales in the coming year are very important to make up for these expenses. We feel that a big portion of future valuation depends on its performance in Canada. Analysts hope that the Canadian stores will perform close to the American stores, but not much can be said with great certainty.

Our Stance:

The Q32012 results of TGT show that it has performed better than the consensus estimates. The shares of TGT seem like a good potential investment as we sense some value for many investors. Its plans to focus on its holiday season offerings can boost sales up in Q42012. According to Citi, TGT is the price leader in 87% of a market basket. We also feel that its expansion in Canada can be quite fruitful, and therefore, give a buy rating to the stock.

Source: Target: Tug-Of-War And Our Buy Rating On The Retailer