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%.
Competitors
The United States’ biggest retailer and the world’s third largest public corporation, Wal-Mart Stores, Inc. (NYSE:WMT) , is trading at a forward P/E (1yr) of 12.58 and has a PEG of 1.56. It’s yielding 2.60% on its dividend and has a PEGY of 1.22. Using earnings estimates, I value Wal-Mart at $80. Therefore, it’s undervalued by almost 9% and appears to be one of the best buys in the retail sector. You can have a further look at my detailed take on Wal-Mart here.
On the other hand, Costco Wholesale Corporation (NASDAQ:COST) is trading at a forward P/E (1yr) of 20.56, which makes it one of the most expensive buys in the industry. It has a dividend yield of 1.10% and a PEG of 1.73. A growth rate of 14.5% testifies to the fact that the company is expected to do well in the coming years. A mean recommendation of 2.1 on the sell side suggests that it’s also one of the best buys in the industry.
Conclusion
Given the fact that the U.S. economy is still recovering at a snail’s pace, margins for the U.S. retailers are likely to remain low, at least until the end of 2013. Furthermore, with the looming risk of another economic recession, shoppers are expected to refrain from excessive spending. As a result, Target Corporation (NYSE:TGT) isn’t expecting a lot from the U.S. market this year.
Target Corporation (NYSE:TGT)’s biggest catalyst this year will be its operations in Canada, where the company expects higher margins. According to the company, the majority of its 124 stores there will be opened this year, giving its margins a significant impetus. This in turn would drive its earnings up in 2013. In short, I recommend buying Target for an upside of at least 8%.
The article Just Buy This Retailer originally appeared on Fool.com and is written by Waqar Saif.
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