Target Corporation: Further Growth is in the Bag

Apr.10.07 | About: Target Corporation (TGT)

One of the better traffic producing mass merchant retail chains, Target Corp (NYSE:TGT) is adamant on getting bigger and better. TGT guidance calls for an 8% increase in stores. Historically, TGT has averaged 4% revenue growth at existing stores (opened over one year) for the past five years.

In order to increase traffic (maintain current growth rate), TGT may reshuffle the product mix with more food items, thus incurring lower margins. Its main competitor, Wal-Mart (NYSE:WMT) is a wizard at generating traffic. WMT can get the customers into the store but seems to be slipping in getting the customers to buy more. TGT gets its customers to buy more but seems to have cannibalized some of its customer store visits with its online shopping site. Could it be that WMT customers are not webbies?

We see TGT enhancing its online sales platform as the 1400+ retail outlets provide a profit base. More important, the same logistical infrastructure used to supply the stores can be used to support an Overstock.com (NASDAQ:OSTK) based operation. TGT will have to augment several regional warehouses with office space and small parcel shipping capabilities. The multiple locations of order centers should reduce shipping costs. TGT is already experimenting with merchandise offered on the website that is not available in its retail outlets.

Share buy-backs have reduced outstanding shares by 2.5% for FY2006 and 2.35% for FY 2007. We anticipate a 7.8% increase in revenue for FY2008 (ending January 2008). Q1 FY2008 will be reported next month (May). EPS estimates for FY2008 and FY2009 are $3.61 and $4.04. We expect TGT stock to trade at 16 - 21 ttm P/E, currently at 18.5.

TGT 1-yr chart
TGT

Disclosure: No conflicts.