Overview: Target (TGT) is a large nationwide discount retailer. As of the end of the third quarter 2007 they had 1,591 stores nation wide. Of these stores, 210 were Super Targets. Since third quarter 2006, the company has built 97 new stores, an increase of 6.5%. Target has also had an increase of 34 Super Targets since Q3 of 2006. This is an increase of 19.3%. The Target corporation sells just about any type of household product imaginable from clothing to food to electronics. They have also supplemented their income with a strong credit card program. The company’s main competitor is Wal-Mart (WMT).
Review:
The Good: Target is a large well known company that is not going anywhere. They have a strong balance sheet and provide quality products to consumers. Target is a brand that consumers have come to know and trust for their everyday shopping needs.
Although Target competes with Wal-Mart, there are many people who despise Wal-Mart and have no problem paying a tiny bit more at a company that they feel has a better image. Many people feel that Wal-Mart exploits their workers and have other questionable business practices. Target makes a natural option for those who are opposed to shopping at Wal-Mart.
Their credit card program has been growing. Target currently offers a Target card through Visa. In comparing the 9 months ended for 2006 with 2007, the credit card contribution to earnings before taxes grew from $374 million to $463 million, a 23.8% gain. The company’s earnings before taxes as a whole for 9 months ended 2007 was $2,959 million. This means their credit card operations attribute to 15.6% of their total earnings. In contrast, credit card contributions to earnings before taxes were only 13.9% of total earnings. A strong credit card program like this means that they don’t need to rely solely on selling a ton of thinly margined items to turn a profit.
Within the company’s credit card business they have been highly effective in receiving their payments. As of Q3 2007, only 3.8% of accounts were over 60 days past due, and only 2.6% were over 90 days past due.
The company has had a share repurchase program in place since 2004. This is good for shareholders, because when the company retires shares of stock, they own a larger portion of the company. This will also help to boost earnings per share. In 2004 they initially declared they were going to repurchase $3 billion worth of shares. This number has grown to $8 billion in stock. To date they have repurchased $90.7 million shares of their stock for a total of $4.646 billion. This leaves about $3.3 billion left in repurchases.
Target pays a decent dividend which is currently yielding 1.05%. The past three quarters they have paid out $.14 per share.
The stock has slid from a recent high of $67.57 on October 5th, 2007 to its’ current price of $53.40. This is likely due largely in part to the fact that the economy didn’t have the strongest holiday quarter and investors have factored that into the stock’s price. Wal-Mart recently reported better than expected sales data which helped to push Target’s price up $1.18/share today. This good news from Wal-Mart comes at a convenient time for Target. Their Fiscal year for 2007 ends February 3rd, 2008. This means that that company should be releasing their annual report somewhat soon. Over the past few months the company has reaffirmed to investors that they should be meeting analyst expectations.
The Bad: The economy will play a large part in how Target performs over the long haul. They appear to have weathered the economic downturn fairly well, holding their stock price within the $60 - $65 range in 9 of the last 12 months, although the stock definitely took a turn for the worse when a lot of the negative economic news was starting to come out.
Although their credit card business has provided them with a boost in income, their net write offs as a percentage of average receivables increased from 4.8% for the 9 months ended 2006 to 5.7% for the 9 months ended 2007. The total net write-offs for each period increased from $215 million to $296 million, an increase of 37.8%.
A continued decline in the economy could create potential problems for their credit card program. If more and more people cannot repay their debts, then the company may have to write off even more bad accounts.
Rising costs of producing goods may cause the company to decrease margins in order to stay competitive with other companies, or increase prices to a point that consumers no longer want to buy their goods, or buy in less quantities.
Opinion: The main hindrances to Target’s growth are its’ increase in write-offs through its credit card program, and the fact that the economy has been going down the drain lately. They can’t really do a whole lot to turn the economy around, but they can affect bad debts and write-offs to a degree. If the economy is bad, they should make qualifying for their card a bit more difficult. If people with low credit scores typically have iffy payment history in a good economy, imagine what they will be like during the not so good times. If they are going to give credit to a barely qualified applicant, they should give a very low initial limit to therefore reduce the amount that these risky borrowers can default.
With Wal-Mart’s recent earnings surprise, it is possible that Target could follow suit, although they have been stating all along that they should be meeting and not exceeding analyst expectations. Either way this is good though considering the state of the economy. Now might be a good time for the company to reduce their rapid expansion. The economy is probably not ready for additional Target stores.
Rating:
Market Sector: The retail sector has been fairly weak as of late. I don’t really foresee that changing any time soon. Wal-Mart reported an earnings surprise, so that gives me a bit more confidence for this sector, but I am still a bit sketchy about how it will fare in the slower upcoming months.
Potential: This company is not going to be your four-bagger stock. Their price has tailed off over the past few months, but it could be due for a resurgence if good news is reported. Based on past trading history, it appears that it has hit a bottom of $50/share. Their lowest close was $48.08 on 1/4/2008. During that period, it spent a total of six trading days closing below $50. It closed below $50 three additional times, with the last being on 1/17/2008 at $49.94. Since its’ low on 1/4/08, the stock has gained 11%. $55 would be the next hurdle for it to get over, which I don’t really see happening in the near future, but this discounted price could be an excellent time to get in on this solid company. A return to $60 would be a nice 11% gain in addition to the dividends received.
Risk: There is a high risk that the economy could continue to fall and the company may not continue to grow as fast as investor expectations. This could lead to a sell-off and a reduction in price. It is fairly likely that this could happen over the course of the next few months. This could create excellent buying opportunities for this company at a discounted price. At a P/E of 15.64, which is slightly lower than Wal-Marts, I feel that anything below $50 is a great bargain.
Conclusion: 3.2 Target is a solid and sound company with a loyal customer base. The company has continued to expand operations, as well as participate in a large stock repurchase program. They also have a decent dividend to boot. The only thing keeping me from giving this company a higher rating right now is the fact that the economy is in such a worrisome condition. Poor economy = reduced consumer spending = reduced earnings for Target = depreciation in stock price. The short term outlook for this company might not be blue skies and rainbows, but over the long term an investor should benefit nicely with this stock in their portfolio.
