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Continuing with my review of retailers and discount stores, today I am reviewing Target (NYSE:TGT).

Target operates large format discount stores which sell brand and white-label apparel, home items, food and day to day consumables. Target operates more than 1,740 stores.

Over the last month, TGT’s stock traded between $33.5 and $35.0

Please refer to the stock review explained post if you have questions on what I look for in this review. Click on this annotated Surfmark if you want to see the source data for this stock review.

1- Business Performance Risk (-) and intrinsic returns (=/-)

Metric

Status

FCF / Sales

Last Twelve Months: 6.0%, in line with last year but much better than previous 10 years which included many negative years and averages about 1% in positive years

ROE

LTM: 18.2%, slightly better than 5 years average of 17.4%. Historically between 15% and 20%

ROA

LTM: 6.2%, in line with 5-year average of 6.5%. Historically between 5% and 10%

Revenue Growth

LTM: 3.1%, in line with 3-year average. Overall, growth seems to have slowed in recent years to 2%-3% after having been in the 7%-10%+ range historically.

Cash distribution to shareholders

TGT pays a small-ish dividend with a dividend yield of 1.4% on a payout of ~20%.

Over the past 5 years, TGT bought back 18% of its stocks.

I am a bit torn about TGT’s performance, but will still rate it a “-“ as the company has had many years of low to negative FCF/sales and has an ROA lower than my threshold. While this could be acceptable in this industry, it is lower than WMT on more volatile and recently slower growth.

In terms of intrinsic returns, an investor could get:

- 1.4% dividend yield using 20% of TGT’s earnings

- 5.0% growth (better than last 3 years but in line with 5-year average, being generous) which would use up avout 30% of earnings

- 3.5% share buybacks using the remaining 50% of earnings on an earnings yield of 6.7%

Total returns potential, slightly below my 10% threshold while already being “generous” with growth compared to recent years performance.

2- Balance Sheet Risk (-)

Metric

Status

LT Debt / Equity

1.03x, above my personal threshold of 1.0x and not driven by intangibles which sometimes make the numbers "tricky"

Current Ratio

1.7x higher than in recent years and above what I have seen with other discount stores

While TGT’s liquidity management seems fine, its leverage is too high for me to be comfortable.

3- Valuation Risk (=)

Metric

Status

Cash Return

7.4%

P/E

14.9x, in line with the market and slightly below the company's 5-year average of 16.5x

TGT's valuation while not low, is not rich either, with a P/E below 15 and a cash return in the 7-8% range. Depending on investors’ growth expectations, this could be ok, but probably does not provide a prudent value investor with much margin of safety.

Conclusion

I will at this point pass on Target and will not perform a stock analysis. Target’s business performance is far from being stellar, even relative to other competitors such as Wal-Mart, and may not provide an investor with enough potential for intrinsic returns. In addition, the Balance Sheet is quite leveraged and the valuation does not leave much room for error.

Have you looked at TGT recently? What was your conclusion?

Disclosure: No position

Source: Why I'm Passing on Target