Discount retailer Target (NYSE: TGT) recently reported disappointing first quarter results, causing its share prices to slightly decline. Nevertheless, it is clear that the retailer still has a lot to offer investors if they keep the stock in their portfolio.
Target announced on May 22 that its first quarter earnings were down as a result of disappointing sales as consumers held off on buying seasonal items such as gardening supplies and clothing due to a chilly early spring. The retailer's profit for the period ending May 4 was down to $498 million, or $0.77 per share, from $697 million in the previous year. Stores operating for at least a year were down 0.6% on their sales for the same period - its weakest performance since the third quarter of 2009, when sales fell 1.6 percent. However, total sales still rose slightly by 1% to $16.71 billion. Needless to say, the results were way below analysts' expectations. Same-store sales were anticipated to suffer a 0.3% decline while total sales were expected to come in at $16.78 billion.
However, weaker results were not limited to Target as the whole retail sector suffered due to the chilly weather. Wal-Mart (NYSE:WMT) and Kohl's (NYSE:KSS) reported lower-than-expected sales, while Lowe's (NYSE:LOW) also reported a weaker-than-anticipated profit for the same quarter.
Due to the unfavorable results, Target scaled down its full-year earnings forecast to $4.70 to $4.90 per share, from its earlier forecast in April of $4.85 to $5.05.
Another factor that drove down corporate results was Target's costs of opening new stores in Canada. Although the 24 stores already open generated some $86 million in sales for the quarter, the costs of the launch brought down earnings by an estimated $0.24 per share during the same period. However, the rollout of the stores is expected to boost revenue growth in the long term. The retailer hopes to have 124 stores open in time for the Holiday shopping season.
On the other hand, Target enjoyed some gains from the finalization of the sale of its credit card portfolio for $5.7 billion to TD Bank Group. The retailer has dropped its Target-branded Visa credit cards in favor of Target store cards that would be accepted only at its offline stores or at its website. Target said it would enjoy a pre-tax gain of some $393 million on the sale, which would pass on to TD the responsibility for regulatory compliance and risk-management policies while it would retain account servicing functions.
The new REDcards have also helped to boost sales slightly due to the five percent discount offered to card holders. According to the retailer, some 17% of purchases were paid for using REDcard credit and debit cards during the quarter, as opposed to nearly 12% a year ago.
Strong Long-Term Outlook
One thing that Target has maintained is its strong brand recognition. The retailer is known not only for selling higher-end aspirational products at bargain prices but also for its range of unique products that are exclusive to it.
In addition, Target has also successfully been able to deal with many challenges in the competitive retail world that other big retailers were not able to meet. For example, in order to avoid 'showrooming', or the practice of many online consumers using its sites for comparison shopping and then making the final purchase elsewhere, the company offered its customers not only exclusive products but also a unique boutique experience through its online site, "The Shops" at Target. As a result of these initiatives, share prices are up 21% from the same period last year. Target is currently trading at $68.67, and its 52-week range is from $56.65 to $71.91.
Also expected to boost sales in the long term is Target's entry into low-margin groceries. The big box retailer announced that it would add grocery sections to many of its local stores. The changes are expected to get people to make more trips into the stores on a regular basis and hopefully convert to buy higher-margin items. Target has already reported that total sales grew by 10% since it introduced groceries.
Meanwhile, the stock has been enjoying solid dividend growth over time. While Target's current yield of 2% is lower than the 2.4% offered by Wal-Mart, its dividend growth is more impressive. Over the past five years, Target's dividend growth has increased by some 21% annually. This means that investors will enjoy better returns over time due to dividends.
The Bottom Line
Despite its disappointing first quarter results, it is clear that Target is still set to enjoy earnings growth in the years to come because of its success in meeting the challenges of a rapidly-changing retail landscape. In addition, its foray into Canada will surely pay off in the long run even if it impacts on earnings in the short term. So if you are looking for a stock that will reward patient investors, Target is a stock that you definitely must keep in your portfolio.
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.