Valuations And Expansion Plans, Both Bode Well For Target Corp.

Sep. 3.13 | About: Target Corporation (TGT)

Target Corp. (NYSE:TGT) is the second largest retailer in the U.S., behind Wal-Mart (NYSE:WMT). TGT has delivered solid financial performance in the past. The company has been expanding its operations in the U.S. and Canada, which I believe remains a long term growth driver for the company. Also, the company has been making strategic acquisitions to strengthen its online presence. Moreover, the company offers a high dividend yield of 2.7% and remains an attractive investment option at its current valuations (as shown below). Furthermore, the stock offers potential price appreciation of 20%, based on my price target of $76. Therefore, I remain bullish on the stock.

Financial Performance
TGT posted soft financial results for 2Q2013, mainly due to cautious consumer spending, intense competition and slower than expected growth in the company's Canadian operations. The company reported earnings per share of $0.95, in line with analyst consensus estimates, down from $1.06 in 2Q2012. Adjusted EPS for 2Q2013 came out to be $1.19, up 6.1% from the $1.20 in the corresponding period last year. TGT reported recent second quarter net sales of $17.1 billion, up almost 2% YoY.

TGT's largest reporting segment, the U.S. segment, contributes nearly 99% to the company's total sales. The U.S. segment experienced a total retail sales increase of 2.4% in the recent second quarter, which was driven by new store growth and a 1.2% growth in comparable store sales. However, total sales growth for the segment fell short of analyst expectations of 2.6%. Top-line results for the segment were adversely affected by intense competition within the industry and a 2% rise in the payroll tax, which adversely affected low and mid income group customers. Gross margin for the segment expanded by 20bps to 31.4%; gross margin for the segment was positively affected by an impact from category rate improvement and a change in vendor agreements. Also, EBIT margin for the U.S. segment expanded by 70bps to 7.2% in the quarter.

Long Term Growth Drivers For TGT

Expansion of stores to fuel long term growth
The company has been aggressively working to expand in Canada to grow its operations. Expansion into Canadian markets remains an important long term earnings driver for the company. The investment and expenses incurred by the company to expand its operations in Canada are likely to result in earnings dilution and will slow down the company's bottom-line growth in the near term. However, once TGT is done with its expansion phase, its Canadian operations will fuel long term earnings growth. In the recent second quarter, TGT added 44 stores in Canada, and expects to open 124 stores in Canada by the end of 2013. TGT is anticipating having 200 operational stores in Canada, which will generate almost $6 billion in annual revenue by the end of the decade.

The fact that the company has been increasing its stores in the U.S. and Canada bodes well for TGT in the long term, strengthening its market share and driving its future top and bottom line growths. The company's management expects to operate more than 2,000 stores over the long term throughout the U.S. and Canada. By the end of 2Q2013, TGT has a total of 1,854 operational stores throughout the U.S. and Canada.

E-Commerce Acquisitions
To improve its online presence and tap the available e-commerce growth opportunities, TGT has made three acquisitions so far this year. Last month, TGT announced the acquisition of online retailer DermStore Beauty Group. The completion of the acquisition will allow TGT to expand its market share in the fast evolving online beauty market. Also, earlier this year, TGT declared that it would acquire CHEFS Catalog and Cooking.com in two separate deals to expand its presence in the growing cooking and Kitchenware market.

Dividend and Share Repurchases
TGT offers a strong dividend yield of 2.7%, backed by a solid free cash flow yield of 16%. In the recent second quarter, TGT paid $231 million to shareholders through dividends. In the last 5 years, the company has increased its dividends by 20% on average.

The company has also been aggressively repurchasing a portion of its shares outstanding. In 2Q2013, TGT repurchased approximately 13.3 million shares for an amount of $927 million. Moreover, it has spent $1.47 billion YTD to repurchase 21.9 million shares of its common stock, which is equal to almost 3.7% of its current market capitalization. As the company continues to repurchase a portion of its shares outstanding, it will magnify its ROE and fuel its future EPS growth.

Conclusion
TGT has delivered healthy financial performance in the past and analysts have projected a robust growth rate of 10.7% for the next 5 years. Also, TGT has attractive valuations as compared to its peers. The company has a cheap forward P/E of 12.6%, as compared to its peers' average of 15.8x. Moreover, it has a high dividend yield of 2.70%, in contrast to WMT's 2.4% and Costco's (NASDAQ:COST) 1.1%.

The table below shows how TGT's valuations remain attractive as compared to its peers' averages.

TGT

WMT

COST

Average

Dividend Yield

2.7%

2.4%

1.1%

2.05%

5 year growth est.

10.7%

9%

13%

10.9%

Forward P/E

12.6x

12.8x

22x

15.8x

PEG

1.45

1.55

1.9

1.65

Click to enlarge

Source: Yahoo Finance

Target Price
The stock offers investors potential price appreciation of 20%, based on my price target of $76, which I calculated using the S&P 500 forward P/E of 15.05x and the CY 2014 EPS forecast of $5.05. Due to the aforementioned factors, I remain bullish on the stock.

Forward P/E S&P 500

CY 2014 EPS est.

Target Price

15.05x

$5.05

$76

Click to enlarge

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.