Target: Better Off In Long Run

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 |  About: Target Corporation (TGT), Includes: WMT
by: Core Equity Research

The retail industry is one of the most important industries because it can measure the health of an economy. As consumer spending increases, it means that the economic conditions are getting better. The retail industry is the second-biggest industry in the United States and employs a huge workforce. Annual sales turnover of the retail industry is more than 12 percent of the total trade volume of all U.S.-based businesses. Furthermore, it accounts for more than 11 percent of total employment in the country.

Target Corp. (NYSE:TGT) is the second-largest discount retail store in the United States after Wal-Mart (NYSE:WMT). It is currently operating more than 1,800 stores in the United States and Canada. Target Corp. posted its fiscal first quarter report, in which its earnings fell 29 percent due to lower sales in seasonal and weather-related categories. Target has been struggling with unseasonably cold weather in the past few months, making it difficult to sell its spring and summer products. The company has also been searching for ways to boost sales as many of its core lower-income shoppers remain extremely cautious with spending amid the lagging economy.

On the basis of its first-quarter earnings report, Target lowered its earnings forecast for the year to $4.70 to $4.90 a share, from $4.85 to $5.05. The important point to be noted here is that despite the drop in earnings, Target managed to beat Thomson Reuters earning expectations of $1.06.

Reasons for the drop in earnings

According to the company's recent first-quarter report, the company suffered losses related to the early retirement debt of 42 cents per share. Additionally, 24 cents per share earnings dilution tangled to the Canadian segment as it opened 24 Canadian stores in the first quarter as a part of its expansion plan to open 124 stores in Canada by the end of the year 2013. Though the company gained 36 cents per share from the sale of Target's entire consumer credit card receivables portfolio to TD Bank Group, the impact of losses is much higher than the gain.

Financial Analysis

Financial performance of a company is very important to understand the strength of the company, especially when the economic conditions are distressed. The company's overall performance has proved to be very efficient in terms of management of its financial resources. The company has been able to project decent growth over the last four years in its revenues.

Click to enlarge

Source: Morningstar

The above graph shows the company's revenue growth and its margins over recent years. We can see that revenues grow substantially in 2010 and continue to increase until 2012, despite the slowdown in the retail market due to the increasing trend of online shopping. Therefore, the decline in margins indicates the tough economic conditions.

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Source: Morningstar

Efficiency ratios are relatively important for retail business because it gives an idea of how well the company is internally utilizing its assets and liabilities. Lower 'Days Sales Outstanding' and higher 'Receivables Turnover' indicate that its extension of credit and collection of accounts receivable is quite efficient. A decreasing Cash Conversion Cycle also supports the previous comment, which is a good sign for the retail company. As you can see, the company managed to drop CCC by 45 percent in the year 2012, when the market conditions were quite harsh for retailers.

Source: Morningstar

Investor perspective is also very important here to measure the financial strength of a company and how the company respects its investors. The above table clearly shows that the company values its investors despite the market and economic conditions. A decreasing number of shares indicates that the company has consistently bought back its shares to boost its EPS. Over the year, increasing dividends are also a positive sign for investors to invest for the long term.

Growth Prospects

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Source: ycharts

The above chart shows the consumer sentiment (confidence), which has been increasing over the period. This is a good sign for retail and discount stores because increasing consumer confidence is a sign that they are willing to spend more. The most important thing to note here is, there are two important factors behind the rising confidence. One is decreasing interest rates in the United States and the second is the declining fuel prices, because these two factors determine consumer ability to visit retail or discount stores.

Conclusion

Retailers are trying to remain competitive primarily by shifting focus to the long-term horizon and finding innovative solutions to create value, reduce operating costs and mitigate risks throughout the company. Right-sizing inventories, enhancing efficiency and advancements in technology are the important factors in determining long-term growth. Despite tough market conditions Target is expanding its business line to increase revenues, which will further help it to generate a higher profit margin in the long term. Though investors can see a slightly downward trend, the company will be better off in the long run because of its strong financial position. I recommend investors be bullish on this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.