Target: A Defensive Name For Your Portfolio

| About: Target Corporation (TGT)
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Target Corp. (NYSE:TGT) is the second largest US discount retailer and operates general merchandise stores and SuperTarget stores. Through its retail segment, the company sells household essentials, hardlines, apparel, home furnishing and food. Its credit card segment aims to strengthen customer relations.

Target's advance into Canada will make it a solid defensive retail stock with a business model predicted to reap about $6 billion in annual sales, and give an approximate 10% annual boost to the retailer's pre-tax earnings.

Target released June same store sales, which rose 2.1% and were below consensus expectations of an increase of 2.8%.

Although June came in softer than recent trends, they remain supportive of management's plan of 3% second quarter same store sales growth. Every region experienced positive sales in June, with strongest performance seen in parts of the Midwest and West, though sales came in below the company average in the South.

Q1 results

Target's Q1 sales of $16.9 billion were in-line with consensus forecasts. Net income in the quarter ended 28 April rose 1.2% to $ 697 million, or $1.04 a share, ahead of the market's expectation of $1.01 a share. Investments to open stores in Canada lowered profit by about $0.08 a share.


Profit this year will be as much as $4.30, up from a previous forecast of a maximum of $4.25 and consensus of $4.26.

Final Note

Target's remodel and loyalty initiatives to drive U.S. sales growth and its strong financial position to support robust dividend growth and an aggressive share repurchase program makes Target a stock with defensive characteristics.

Target should see benefits from renovating its U.S. retail stores to expand the food section and remodeled in other key categories such as its home, beauty and baby departments.

Results from P-Fresh continue to meet management's traffic/sales expectations. While the greatest lift to sales has occurred within grocery and household essentials, merchandise reinventions within other areas of the store are driving better results too.

Inventory was in good condition at the end of June, which is important heading into the back-to-school shopping season. Target's Canada entry needs some heavy investment this year, but should be positive in the long run. By 2017, Target anticipates to generate $6 billion in sales and about 10% of consolidated EPS from Canada.

Target offers value at a reasonable price and with a P/E ratio of around 13 it trades under the company's historical average of 14.3. The company's valuation is also below the North American general merchandise and department store peer group average of 15.3.


Of course there are some risks and challenges that investors should be aware of. Target's sensitiveness to US macroeconomic conditions, adverse effects on sales due to price policy and marketing efforts of competitors such as Wal-Mart are some of the risks.

Other risk factors include the reduced ability of Target credit cardholders to pay their balances and unsuccessful product releases.

For example consumer confidence in the US dropped in June for the fourth consecutive month. However, this negative trend should partially be offset by lower gasoline prices. In fact, a penny decline in fuel prices adds $1 billion to consumers' purchasing power. Gasoline has dropped by about 15% (or 60 pennies) since the beginning of April acting like a tax relief on the consumer.

As you can see every negative has a positive.

Despite these risks Target but also some other large cap retailers such as Wal Mart (NYSE:WMT) perform well in good times and don't get hammered in bad times. Both companies sell things people must have, like food, tissues and toothpaste.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.