Target's so-so results good enough for Wall Street

The discount retailer soldiers on during uncertain economic times.

By Jonathan Berr Aug 15, 2012 10:53AM

Target (TGT) posted quarterly results Wednesday that were good good enough for Wall Street. Problem is, they just weren't all that good.

Net income was $704 million, or $1.06 per share, little changed from the previous year. Revenue rose 3.3% to $16.78 billion. Wall Street analysts had expected Target to earn $1.01 on revenue of $16.75 billion.

Shares, which have gained nearly 26% this year, were up in early trading.

Under CEO Gregg Steinhafel, Target has expanded into the grocery business, helping crush incumbents such as Supervalu (SVU). Prices for food at Target are so much lower than in other chains that my family no longer even bothers to compare prices. Target's only serious competition in groceries is Wal-Mart (WMT). This is good news for consumers, because these retail behemoths will keep prices low as food costs continue to rise.

As at Wal-Mart, cash-strapped consumers go to Target in search of bargains. Target's U.S. sales in the latest quarter jumped 3.5% to $16.5 billion, while comparable-store sales rose 3.1%, which is very good, considering economic growth is slowing. Target's decision to open CityTarget locations in Seattle, Los Angeles and Chicago along with its expansion in Canada will also pay off.

Target's results come on the heels of better-than-expected results at off-brand retailer TJX (TJX), the largest home improvement retailer Home Depot (HD) and high-end department store chain Saks (SKS).

Wal-Mart, Target's larger rival, is scheduled to report quarterly results Thursday. Analysts expect a profit of $1.17 per share on revenue of $114.63 billion. Interestingly, Wall Street is forecasting Wal-Mart's U.S. sales to gain 2.5%, with established stores seeing a gain of 2.1%, lagging Target. Wal-Mart's shares have gained more than 24% this year, slightly below its rival's.

As my colleague Gene Marcial
pointed out, some Wall Street pros expect Target shares to hit $100 in the next five years. The current average 52-week price target is $65.14, about where it trades now, which seems too conservative.

Target raised its 2012 earnings guidance to a range of $4.20 to $4.40 per share on a GAAP basis and $4.65 to $4.85 per share on an adjusted basis. Analysts had forecast earnings of $4.31 per share. Target sees third-quarter GAAP earnings of 69 cents to 79 cents per share and adjusted earnings of 83 cents to 93 cents per share. Analysts had forecast earnings of 76 cents per share.

With a price-to-earnings ratio of 14.62, Target's shares are valued attractively and would make a good addition to the portfolios of conservative investors. The stock is trading at a price-to-earnings ratio that is below its five-year high of 17.04, according to Reuters. Moreover, Target pays a 2.3% dividend, slightly better than the 2.1% yield offered by Wal-Mart.

Both retailers should continue to muddle through during uncertain times. These days, that's about as good as investors can expect.

Jonathan Berr is long Target and Wal-Mart. Follow him on Twitter@jdberr.



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