Target Gets a Lift from Guidance

Target Stores (TGT) reported June sales results that were a bit of a disappointment as overall sales fell .8% from a year ago, and the key indicator of same store sales were worse than analysts had estimated, falling 6.2%. Target is arguably the most important retailer that continues to report monthly sales totals, since Walmart (WMT) discontinued its monthly reporting in the last year. The market was able to shake off the worse than anticipated sales results because of the company’s upbeat forecast for the second quarter ending in less than a month. The company said that they would expect to at least meet and most likely exceed consensus analysts’ earnings estimates of 62 cents per share.

“Discounters were the winners coming in better than expected on lower sales. And Target, as mentioned, is upping its outlook. They do see some stabilization in their credit card area.” CNBC’s Squawk on the Street 7/9/2009

As with nearly all retailers reporting their June sales results, Target underachieved, but there were certain elements in the release that were encouraging. In addition to the improvements in the credit card portfolio, the company is expected earnings to be better because profit margins are looking better than anticipated. That seems to be anathema to the U.S. savings rate increasing to 16-year highs, which would suggest that consumers are forgoing the non-essential, discretionary purchases that normally are associated with higher margins. Target may be benefiting from consumers trading down on purchases of clothes and other items at the expense of The Gap (GPS) and Abercrombie & Fitch (ANF).

We are reaffirming our Undervalued valuation on Target because the company’s stock price has been degraded in excess of the drop off in fundamentals. Analysts have become much more positive on the earnings prospects for the stock over the last couple of months lifting estimates for the second quarter and full year by 12% and 17% respectively. Now, Target has come out and raised expectations again, saying that they will meet that earnings target. The stock is trading at attractive levels right now, with a multiple of only 13.5x expected fiscal 2010 earnings. The stock is selling at just .42 times revenue per share, whereas Target has historically has traded in a price-to-sales range of .56x to .88x. With same store sales slumping, growth is not the most compelling factor in regards to Target right now, but the value is attractive. We are likely to continue to rate this stock as Undervalued until it gets into the mid $40s which would, by our methodology, be a more appropriate price.

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