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Analyst Blog

The economic climate is still unstable, consumers remain wary and competition remains tough. In this scenario, Target Corporation (TGT - Analyst Report) has to walk a tight rope, given the unprecedented events. The company is persistently trying to keep itself afloat in this sluggish economic environment through its P-fresh remodel program, 5% REDcard Rewards program, City Target stores and The Shops at Target.

The Drivers

Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that increased focus on consumable items should boost sales and earnings in a soft consumer environment. The company’s long-term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017.

In order to tap the urban markets where real estate remains a constraint, Target plans to introduce smaller-format stores called City Target, similar to its biggest rival, Wal-Mart Stores Inc. (WMT - Analyst Report). The company informed that the new stores will vary in size from 60,000 to 100,000 square feet compared to its typical format of 125,000–180,000 square feet.

We believe that this approach will help the company augment its sales. Target unveiled its first three smaller format stores in Los Angeles, Seattle and Chicago, with plans to open two more similar format stores, one each in Los Angeles and San Francisco.

The Need to Diversify

The greater concentration of the company’s revenue generating capabilities in limited regions of the United States, poses a competitive threat to Target, compared with Wal-Mart and Costco Wholesale Corporation (COST - Analyst Report), which are geographically diverse and more resourceful.

Target is eyeing opportunities in international markets, such as Canada and Latin America. The company plans to open 125 to 135 stores in Canada by 2013 and 2014. We believe, store openings outside the United States will definitely boost the company’s top and bottom lines and better its cash flow generation capability.

Challenging Economy

The economy is still not out of the woods. It is evident that the company’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 affect their discretionary spending, and in turn curtail the company’s growth and profitability.

The global credit markets have recently undergone a significant disruption. This may create difficulties for companies to obtain financing on reasonable terms, and may jeopardize the company’s future growth plans.

Closing Comment

The above analysis supports our unbiased view on the stock, and therefore, we advocate our long-term “Neutral” recommendation on the stock. However, Target retains a Zacks #2 Rank that translates into a short-term “Buy” rating and well defines the company’s relentless endeavors to keep itself on the growth trajectory.

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