Shares of Target (TGT), the retailer selling a wide range of merchandise in over 1,700 stores, rose more than 2% over the past week. On Wednesday, the company reported a decent set of second quarter results.
Second Quarter Results
Target reported second quarter revenues of $16.78 billion, up 3.3% on the year. On average, analysts expected the company to report revenues of $16.75 billion. The company reported net profits of $704 million, or $1.06 per share. Adjusted-earnings rose 4.6% to $1.12 per share, coming in at the high-end of the guided range of $1.04-$1.14 per share.
Comparable sales at the US retail stores came in at 3.1%, while new store openings boosted revenue growth to 3.5%. Traffic, selling prices and volumes were all on the rise. EBIT rose 2.9%, in line with revenue growth, to $1.18 billion. The contribution from the credit card division came under pressure as receivables fell 5.0% to $5.9 billion. Furthermore the spread above LIBOR narrowed from 12% to 9.5%.
The company remains on track to enter the Canadian market by early 2013. The company lost $69 million on an operating basis, due to start up expenses related to the entry. The start-up costs impacted second quarter earnings by $0.09 per share.
During the quarter, the company repurchased 9.6 million shares at an average price of $57.09, for a total cost of $549 million.
CEO and Chairman Gregg Steinhafel commented on the results, "We're pleased with Target's strong second quarter financial performance, which reflects a continued focus on delivering an outstanding experience for our guests and disciplined execution of our strategy. In addition we're very pleased with the initial response to the July opening of our first three CityTarget locations in Seattle, Los Angeles and Chicago."
For the third quarter of 2012, the company expects to report GAAP earnings per share of $0.69-$0.79. Non-GAAP earnings are expected to come in between $0.83-$0.93, exceeding analysts consensus of $0.76 per share. The company estimates that the entry of the Canadian market will result in a $0.14 charge for the third quarter. For the full year of 2012, GAAP earnings per share are estimated to come in between $4.20-$4.40.
Target ended its second quarter with $1.4 billion in cash, equivalents and short term investments. It operates with roughly $18.5 billion in various kind of short and long term debt, for a sizable net debt position of roughly $17 billion.
For the first six months of its fiscal 2012, Target generated revenues of $33.6 billion. It net earned $1.4 billion, or $2.02 per diluted share. At this rate the company is on track to report annual revenues of $72-$74 billion. Target could earn $2.9 billion, or $4.30 per share for the full year.
Based on Friday's closing price, the market values Target at roughly $42 billion. This values the business at 0.6 times annual revenues and 14 times annual earnings. The valuation compares to a revenue multiple of 0.5 times for Wal Mart (WMT) and 0.5 times for Costco (COST). Both competitors trade at 15 and 27 times trailing annual earnings, respectively.
Currently, Target pays a quarterly dividend of $0.36, for an annual dividend yield of 2.2%.
Year to date, shares of Target trade with gains of roughly 25%. Shares steadily rose throughout the first half of 2012 towards current levels of $64 per share.
Shares trade largely unchanged over the past five years, but have moved within a wide trading range of $25-$65. In the meantime, Target steadily grew its annual revenues from $65 billion in 2008, to an estimated $73 billion for 2012. At the same time, net profits grew from $2.2 billion in 2008, or 3.4% of net revenue, towards an estimated $2.9 billion in 2012, or 4.0% of net revenue. Diluted earnings per share rose from $2.86 in 2008 to an estimated $4.30 for 2012.
The company is well managed and has shown a steady improvement in operational performance in recent years. Furthermore value has been created by boosting profitability margins and engaging in sizable share buyback programs.
Target's valuation of 14 times earnings is a little misleading given the $0.45-$0.50 losses related to the Canadian market entry. Excluding these start-up costs, earnings could come in around $4.80 for the year, valuing the company at 13 times earnings. The company sees continued momentum into the third quarter as its loyalty program and the addition of food items in the assortment is well-received.
A future boost could be the start of the Canadian operations in the beginning of 2013. The company hopes to be renovate 45 stores by the end of the third quarter.
Target is a steady performer, creating value for investors in the long run. Don't expect spectacular short term returns, however the long term picture looks good as the company demonstrates operational excellence and engages in shareholder friendly financial strategies.