Target in Neutral Lane - Analyst Blog

Target Corporation's (TGT">TGT) efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumables should boost sales and earnings in a sluggish consumer environment.

Going forward, the company will focus more on store renovations and improving store sales productivity. Target plans to remodel nearly 380 stores in fiscal 2011, which include an expanded grocery offering, improved store layout and enhancement of in-store shopping experience across departments, such as beauty, home, electronics and video games.

Moreover, by the end of 2011, Target plans to introduce P-fresh in-store food and grocery sections in approximately 850 discount stores. The company expects P-fresh to boost 2011 comparable-store sales by 1% to 2%.

Target, similar to that of its biggest rival Wal-Mart Stores Inc. (WMT">WMT), plans to introduce a smaller store format of 60,000 to 100,000 square feet compared to the current format of 125,000 to 180,000 square feet, to tap the urban markets, where real estate remains a constraint. The test for smaller format stores is slated to begin in the next few years.

Another opportunity, which Target is eyeing is the opening of stores in international markets, such as Canada and Latin America. The company plans to open 100 to 150 stores in Canada by 2013 and 2014. We believe the openings of stores outside the United States will definitely boost the company's top and bottom lines and improve its cash flow generation capability.

However, Target's customers remain sensitive to macroeconomic factors, including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending and in turn the company's growth and profitability.

Moreover, Target  faces stiff competition in the retail segment from discount stores, department stores, drug stores, specialty stores, supermarkets, wholesale clubs and other forms of retail commerce on attributes such as location, price and quality of merchandise, in-stock consistency, merchandise assortments, and customer service. This may weigh on the company's results.

Given the pros and cons, we prefer to be Neutral on the stock. Moreover, Target, which currently operates 1,752 stores, holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.

 
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