Target Corporation (TGT) is a very successful company that has a great future. The key to Target's success is its enviable business model that has served the company well for over half a century. Target opened its first stores outside the U.S. in 2013, and has plans to open many more in the coming years. The company also offers a relatively cheap stock and a decent dividend yield. Long-term investors are advised to seriously consider adding Target to their portfolio.
Important Factors For Analysis
Target has one of the best business models in the world. That business model has remained largely the same since its founding in the 1960s. It includes distinguishing the company through cheap, but high-quality retail goods. Target is a beloved brand in the U.S., and is sure to be loved across the world. Target, due to its high-quality products, has repeatedly been included in Fortune's "World's Most Admired Companies" list. In 2013, it ranked above companies like Johnson & Johnson (JNJ), Boeing (BA), and PepsiCo (PEP).
Target is the second-largest discount retailer in the country, after Wal-Mart (WMT). Target offers both everyday essentials and fashionable, differentiated merchandise at discounted prices. Target operated 1,778 stores in the U.S. in February 2013.
Target's chief competitive advantage is its aesthetic appeal. Its products are more upscale and trend forward. Most of its competitors such as Wal-Mart, Kmart, and Sears(SHLD) lack this aesthetic sense. Thankfully, this philosophy focused on product differentiation based on quality was set in place by the founder, and is a well understood factor in its success. John Geisse, Target store's founder, researched the strengths and weaknesses of discount stores in 1960 and found that most stores only focused on low-price goods, and had less emphasis on quality. Target decided to offer "high-quality merchandise at low margins, rather than offer dramatic price cuts on cheap merchandise." Consequently, Target stores have offered slightly higher-priced goods, though still inexpensive, but clearly superior in value to those found at other stores.
Target has a keen focus on international expansion. It opened 24 stores in Canada in March 2013. This was Target's first foray outside the U.S. Target has plans to open 124 stores in Canada in 2013. Such expansion will help Target get a taste of revenues outside the U.S. It can then be on its path to opening stores in Europe and in the emerging markets in Asia.
The current ratio at Target is relatively low, at 1.16. The current ratio has been slipping the last few years. It was at 1.7 in 2009. Due to lower amounts of cash available, dividends may need to fall in the future. In addition, the company repurchases shares every year, and will continue the program for the next few years, at least. This will put further pressure on the cash reserves.
Long-term debt has decreased 16% in the last five years. During the same time, equity increased 20%. The long-term debt-to-equity ratio is currently at .88.
The company's balance sheet seems relatively good, and improves each year. Even though the company's cash reserves seem low, the cash flow from operating activities is sufficiently high. Target could lower both dividends and stock repurchase to replenish the cash reserves, if needed.
Target has an attractive PE ratio, at 16.53. The PE ratio seems lower than the general market's because the company has underperformed over the last few years. The net earnings have been stagnant, however the EPS rose due to share repurchases. Even though the earnings have lagged, the revenues have been increasing. Over the last few years, cost of sales has risen aggressively and lowered margins. As the boom in commodities ends, higher margins would make up for the current stagnation.
Target faces intense price-based competition from other discount retailers. Case in point is the 2008 recession, when consumers flocked to Wal-Mart because of its dominance in the cheap products category. However, Target enjoys a unique distinction. It is perhaps the only discount retailer that offers very high-quality goods at relatively low prices. This emphasis on quality is hard to achieve and harder to repeat. A loss of such distinction would make it very hard for Target to compete with Wal-Mart. This is the biggest risk the company faces.
Target is a 'BUY' for long-term investors. The company has the potential to significantly increase its earnings in the long term. This is so because Target has a long record of following its unique business model. It is one of the companies that are expected to be around for a very long time.