Just Buy This Retailer: Target Corporation (TGT)

Headquartered in Minnesota, Target Corporation (NYSE:TGT), is the second largest discount retailer in the United States. As of March 4, 2013, Target had 1,778 stores in the United States. Apart from its stores, Target Corporation (NYSE:TGT) also sells its general merchandise through its website—Target.com.

Quarterly Earnings

Recently, Target Corporation (NYSE:TGT) announced its earnings for the fourth quarter of 2012. Target reported earnings of $961 million, or $1.47 a share, down from $981 million, or $1.45 per share, a year earlier. The retailer missed its earnings estimates as the number of purchases was down 1%. Gross margin decreased to 27.8% from 28.4% last year.

Food and other basic items did really well, but the gift items didn’t show a lot of promise, especially in the holiday season. It was the worst holiday season for the company since 2008. More customers used their credit / debit cards, which allow a 5% discount to loyal customers. About 15.5% of store purchases were paid through cards, which grew 4.7% from the same quarter last year. Moreover, the discounts offered during the holiday season put a downward pressure on company’s margins.

Going Forward

Target Corporation (NYSE:TGT) has plans of testing its new programs, like letting its customers pay online and collect in-store, delivering items on the same day, and catering to shoppers using mobile phones. Also, the company is about to give its credit card portfolio to Toronto Dominion Bank and will be opening 124 stores in Canada. For the year, Target is expecting its revenues to increase by 2% versus a growth of 5.1% in 2012. Sales at stores open at least a year are estimated to grow by 2.7%.

In this quarter, analysts expect Target Corporation (NYSE:TGT) to earn $1.02 per share on revenues of $17.07 billion. For the full year, analysts’ estimates stand at $4.71 a share on revenues of $75.70 billion.

Valuation

Target is trading at a forward P/E (1yr) of 12.03x and has a PEG of 1.23. Incorporating a dividend yield of 2.20% into its PEG gives us a healthy PEGY of 1.04. Using an industry forward P/E of 15.06x, I would value Target as follows:

Using consensus estimates for the current year, Target’s value comes out to be $71, showing an upside potential of almost 8%. Adding a dividend yield of 2.20% gives a total return of more than 10%.