Target Loses Momentum - Analyst Blog

Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted lower-than-expected sales results for the five-week period ended January 1, 2011.

The company lost momentum as is evident from the comparable-store sales results for December 2010 that rose marginally by 0.9%, following an increase of 5.5% in November 2010 and reflecting a drop from an increase of 1.8% witnessed in December 2009.

The slight increase in comps was the result of growth in average transaction size with a modest rise in comparable store transactions.

By category – grocery, apparel and healthcare and beauty reported healthy sales results. However, hardlines sales fell with sluggish performance experienced across electronics, toys, sporting goods, music, movies and books. Comparable-store sales of home decor remained soft.

Year-to-date, comparable-store sales climbed 2.1% compared with a fall of 2.7% in the same period last year. Based in Minneapolis, Minnesota, Target said that net retail sales for December rose 1.4% year-on-year to $9,882 million, whereas year-to-date, sales climbed 3.8% to $61,404 million.

Management now expects a low- to mid-single-digit increase in comparable-store sales for January. Target said that consumers are responding well to REDcard Rewards program that offers 5% discount on payment through Target Credit Card, Target Visa or Target Debit Card.

Target hinted that it remains well positioned to achieve its fourth-quarter 2010 sales and profitability goal. The company at its third quarter earnings announcement notified that it expects the fourth quarter comps to rise between 2% and 4%. 

Target's strategic initiatives should help drive comparable-store sales and operating margins in the long term. We believe that increased focus on consumable items will boost sales in a sluggish retail environment.

The company is also managing its costs effectively resulting in margin improvement and bottom-line growth. Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in international markets. However, an unfavorable consumer spending pattern and increased competition still remain concerns.

Target, which currently operates 1,752 stores in 49 states, faces stiff competition from Wal-Mart Stores Inc. (WMT). Currently, we have a Neutral rating on the stock. Moreover, Target holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.

 
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