By Jonathan Chen, Benzinga Staff Writer

Target (TGT) really hit the mark Wednesday with earnings that blew away Wall Street estimates.

The Minneapolis retailer reported earnings of 87 cents per share on $16.4 billion in revenue. Analysts were looking for earnings of 74 cents per share on $16.3 billion. In addition, Target guided fourth quarter earnings of $1.43 to $1.53 per share, about in line with estimates of $1.48 per share.

The earnings beat and solid guidance were part of the reason shares jumped 3% in pre-market trading Wednesday, although shares later retraced those gains to close down .5% to $52.94.

"We're confident that we have the right strategy and team in place to drive continued strong performance this holiday season and well into the future," said CEO Gregg Steinhafel.

A major contributor to the improved earnings was improvement in Target's credit-card portfolio. As credit trends continue to improve for Target, as well as the economy in general, this should help drive earnings power. The company is still in line to sell its credit-card unit, although Target could be rethinking that strategy after seeing a 10% profit increase (to $143 million) in this reporting period.

Target has also done an excellent job of expanding into groceries to help gain market share, and saw a 4.3% rise in same-store sales during the third quarter -- the largest increase since 2007. Although gross margins continued to fall, thanks in large part to the grocery initiative, costs fell further to offset the decline in margins. This allowed the decline in expenses to flow right through to the bottom line. Gross margins in the third quarter were 30.5%.

The fourth quarter is traditionally the busiest and highest-revenue time for retailers, and Target is no exception. It is being incredibly competitive with its Black Friday sales, opening stores at midnight on Nov. 25 to compete with Wal-Mart (WMT), Best Buy (BBY), and other major retailers.

With expenses falling faster than margins and the company trading at less than 2012 expected earnings, plus a 2.3% dividend yield, Target has been able to finally get the mix right to go after Wal-Mart for the "cheap chic" customer it once had before the recession started.

This quarter certainly proved that management is well on its way to this initiative.

ACTION ITEMS:

Bullish:
Traders who believe that Target will continue to gain traction in sales might want to consider the following trades:

• Target is trading below its historic valuations, and it could see some multiple expansion and favorable analyst comments after this report. Consider looking at this name.

• Also consider shorting Wal-Mart if you believe that Target is taking market share away from Wal-Mart. Go long Target, short Wal-Mart in a pairs trade.

Bearish:
Traders who believe that the economy will get worse may consider alternate positions:

• Dollar stores have been picking up market share against Wal-Mart, and the same could eventually happen to Target. Consider names like Dollar Tree (DLTR) and Dollar General (DG). 
  
  

Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security.

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