Investors Appear to be Right on Target

| About: Target Corporation (TGT)

I have always had a hankering for Target (NYSE:TGT) stores since I first shopped in one as a teenager. The Target store, while providing value for the consumer, also provides quality products and focuses on mid-range goods. I prefer this strategy as opposed to Walmart’s (NYSE:WMT) focus on strictly discount items.

Target’s Financials

TGT recently reported Q2 EPS of $0.80 per share, in line with consensus of $0.80. Revenue rose 9.5% year-over-year to $14.62 billion versus consensus of $14.6 billion. The company reaffirmed fiscal 2008 EPS of $3.60, which is within the range of likely outcomes versus consensus of $3.62.

Bear Stearns has indicated that Target’s attributes include strong revenue driven by higher late fees and more spending on its credit cards, inventory was up only 6% at quarter-end, and gross margins performed well despite Wal-Mart (WMT)’s higher promotions.

Bear notes that despite a small deceleration in sales comps, the TGT customer is still healthy and not “trading down” to discount items. Bear remains encouraged by the good showing in women’s apparel and from improving sales in home-related items.

Credit Check

One of my favorite aspects of the Target revenue generating machine is the Credit Cards business, which has contributed 21% of operating income this quarter, up from 19% in the year ago quarter. This further demonstrates the the profitability of the store credit business.

It is estimated that delinquencies should track around 3.5%-4% for the year and net write-offs should be 7-8% of average receivables, in-line with 2004 and 2005 rates. This lower delinquency rating is due, in part, to Target’s focus on the middle class consumer who is more inclined to pay their debts as opposed to the discount consumer.
Customer Profile

Target’s dedication to the middle class consumer is now paying huge rewards as its performance has been stellar of late while Walmart’s performance has struggled as the retail giant continues to focus on the lower end discount market.

Bear maintained its Peer Perform rating, noting that the shares are trading at 16.6x its 2007 EPS estimate, below its 3 and 5-year average forward P/E of 19X, but above its projected long-term growth rate of 15%.

The Dividend

With a dividend payout ratio of just 14%, Target has plenty of earnings left over to help fund future growth while still maintaining a nearly 1.0% dividend yield.

In addition, we always like to see consistent dividend growth with companies that we invest in at Dividend Money and Target has grown its dividend from $0.20 in 2000 to $0.56 in 2007. This increase in dividend of nearly 300% over 7 years is excellent in comparison to its competitors, not to mention the capital growth of over 30% over the past 52 Weeks.

Target also scores points here at Dividend Money for being a member of Mergent’s Dividend Achievers, which adds to its credibility as an outstanding dividend paying stock.

Even after this enormous growth, Citigroup still sees upside to Target (TGT) of about 12%.

Disclosure: The author does not own any shares of Target (TGT).