Bulls Eye for Target

 |  Includes: COST, TGT, WMT
by: Hilary Kramer

While I know plenty of people who won’t set foot in a WalMart (NYSE:WMT), claiming it’s too downmarket or they don’t like the reputation it has for its treatment of employees, I’ve never heard those things with Target (NYSE:TGT). While I’m agnostic on Wal-Mart, I’ve always liked the sleekness of Target’s design and label, and I’m not surprised that their terrific model attracts a regular and loyal base of middle and higher income customers who like Target’s blend of low prices and attractive brands and store layouts.

Personally, I think this success is going to continue despite concerns about the economy, higher interest rates, and the cost of gasoline. For one thing, any downturn in the economy is likely to send more customers to discount stores like Target; the people who have been shopping at higher end stores like Williams Sonoma are probably going to turn to Target, which offers nice up-market brands at a lower price, rather than to Wal-Mart. Moreover, the kind of middle and upper income people who have been shopping at Target already aren’t as likely to be hit by gasoline prices, and their shopping is likely to continue.

So far, the results have proven me right. Despite lowering estimates for same-store results in July, Target reported solid growth for the second quarter, continuing the store’s steady growth for the past few quarters. The company also estimated that its margins would continue to improve. The company generates lots of cash to keep its balance sheets healthy, and the rest of its fundamentals look solid.

Target is also investing heavily in itself in an effort to keep improving its margins; it is also expanding its food and consumables offerings. While these divisions tend to have lower margins, they also attract more regular shoppers, which should drive sales among the rest of the higher-margin offerings.

One always has to worry about Wal-Mart and Costco (NASDAQ:COST), of course, but Target has such an identifiable and appealing brand that I don’t think its customers are likely to defect. There has been an eyebrow-raising suit filed by the Equal Employment Opportunity Commission [EEOC], which alleges that a Target store in Wisconsin ignored the resumes of African American applicants. If Target loses the case, which was just reinstated by an appeals court, it could hurt their image a bit and cost them some money.

Type of stock: One of the largest discount retailers in the country, with steady growth and a terrific brand name.

Price target: The company is currently trading closer to its 52-week low than its 52-week high of $59. I think it’s really undervalued and would grab this one soon and hold on for a while.

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