Target-ing a Valued Future

Target Corporation (NYSE: TGT) shares are approaching their 52-week low after witnessing lower sales, tighter margins and higher delinquencies in its credit card portfolio. Despite these near-term problems, some investors remain confident in Target’s long-term prospects as the economy recovers along with its significant owned real estate portfolio.

Solving Short-term Problems

Target faces several problems as a result of the deteriorating economy. The sharp decline in consumer spending over the past several months has led to lower sales across its stores. However, January’s 0.6% increase in consumer spending could signal a bottom in spending declines. Meanwhile, the store is repositioning itself as a low-cost retailer to compete with the likes of Wal-Mart (NYSE: WMT).

Delinquencies on Target’s credit card portfolio have also been hitting the bottom line, which prompted the retailer to make changes in its credit card terms three times in the past year. Target boosted its credit card’s APR and changed its late fee structure in order to increase revenues and offset increasing delinquencies. Meanwhile, the retailer has maintained it’s A+ credit rating by S&P.

Unlocking Long-term Value

Bill Ackman’s Pershing Square, which owns approximately 7.8 percent of Target, believes that the stock is significantly undervalued. The activist hedge investor proposed that the retailer spin-off the land underneath its stores into a real estate investment trust (REIT) that would have the lease terms tied to the consumer price index (CPI). Ackman believes this real estate is worth more than $30 billion – or $39/share – and that value would be forced out in a so-called “TIP REIT”.

Unfortunately, Target has been reluctant to take any significant actions during the economic decline, despite Ackman’s 100+ page detailed proposal showing that the transaction would have no negative effects. Meanwhile, Ackman took a substantial loss on his holdings as Target shares continue to decline. Now, the activist is seeking board representation in order to push his proposal and unlock value.

Looking Ahead

The deteriorating economy continues to impact Target’s top and bottom line growth, but recent increases in consumer spending could signal a turnaround in the middle of 2009. Meanwhile, Ackman’s push for board representation could provide a catalyst for the unlocking of long-term value.

Comments

[SayWha:]

Target may be "repositioning itself as a low-cost retailer", but is it actually lowering prices? I don't think so.

Mar 05 02:44 PM

[MyMerona:]

I don't know about you, but I hate going into Walmart now more than ever. Too crowded, too loud, too cluttered. Long lines at the checkout. Walmart probably won't hang on to their new recession shoppers for long. Too many other retailers offer a better experience. Of these, Target is the biggest - and one of the most competitive in terms of price.

Mar 05 07:32 PM

[Home Grown:]

I think Target will weather the storm that all retailers are going through. If they continue to use the model plan they have been using for years, they will come out of the recession smelling like a rose. The shopping experience at Target is much better than Walmart. I can only speak for the comparison in my area. The stores are better staffed, cleaner, more organized, less waiting time to pay for, or return a item. On pricing Walmart has a small advantage. One on the local Television stations here went to both stores with a predetermined shopping list and found the totals between Target and Walmart virtually the same.

Mar 07 01:39 PM