Target Still Lags Wal-Mart Despite Improving Numbers

Includes: TGT, WMT
by: Research Recap

On the heels of Standard and Poor’s raising concerns about Target Corp, (NYSE: TGT) James Goldstein of CreditSights maintains a skeptical view in comments on the discount retailer’s quarterly results, which were better than expected.

Selected excerpts:

Target reported a 2.7% YoY decrease in 2Q09 sales to $14.6 billion and a 2.2% YoY decline in Adj. EBITDA to $1.65 billion. Comp stores sales were down 6.2%, on a decline in average transaction size and store traffic. A deflationary environment for food & beverage was a partial driver of the decline – in keeping with the trends seen at Wal-Mart, but the company still managed to underperform WMT on the topline.

With the company’s long proxy battle with Bill Ackman/Pershing Square successfully completed, management should be able to focus on their core business. In a recent SEC filing Ackman owned 3.5% of Common Stock with 0.9% beneficial ownership coming from call options, this is a change from previous filing of ownership of 3.3% of common stock and beneficial ownership of 4.5% in call options.

While even the venerable same store sales growth streak at WMT was broken in the quarter, Wal-Mart continues to deliver a stronger topline result, with equally good expense management.

We continue to view WMT as a more attractive investment relative to TGT and maintain our underweight recommendation on a relative value basis.

However, Robert Drbul, an analyst at Barclays Capital in New York, was impressed by Target’s performance. He rates the stock ”overweight.”

Ditto William Blair analyst Mark Miller, who points out it was the highest gross profit for the company since it began disclosing segment gross profit back in 2003. Miller, who has an Outperform rating on the stock, theorizes that the higher margin was in part secured by paying suppliers faster.