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Amidst sluggish economic environment, cautious consumer spending and intense competition, Target Corporation (TGT - Analyst Report), the operator of general merchandise and food discount stores in the United States, posted third-quarter 2012 results.

Including costs related to Canadian operations and benefits associated with the pending sale of credit-card receivables portfolio, quarterly earnings came in at 96 cents a share, up 17.6% from 82 cents earned in the prior-year quarter on the back of healthy sales. Lower shares outstanding also provided cushion to the bottom line.

Excluding the above items, the company posted adjusted earnings of 90 cents a share that rose 4.3% from 86 cents delivered in the year-ago quarter. The quarterly earnings including U.S. operations and costs related to Canadian operations came in at 77 cents a share. Analysts polled by Zacks had projected earnings of 79 cents a share for the quarter.

Let’s Unveil the Picture

Total revenue climbed 3.2% to $16,929 million from the prior-year quarter, and came in line with the Zacks Consensus Estimate. U.S. retail sales grew 3.4% to $16,601 million as shoppers are gradually opening up their wallets but still remain wary.

Minneapolis, Minnesota-based Target said that comparable-store sales for the quarter rose 2.9% compared with a 4.3% increase registered in the prior-year quarter. The number of transactions rose 0.5%, whereas the average transaction amount climbed 2.4% in the quarter.

Gross profit at the U.S. Retail segment jumped 2.9% to $5,032 million; however, gross margin shriveled 20 basis points to 30.3%, as the rate of increase in sales were not able to fully offset 3.6% rise in cost of sales. Segment operating income increased 3.4% to $963 million, whereas operating margin remained flat at 5.8%.

The company indicated that revenue from the Credit Card segment tumbled 5.8% to $328 million. Target also said that segment profit dropped to $138 million in the quarter from $143 million in the prior-year period.

Target’s credit card penetration increased 110 basis points to 8%, whereas debit card penetration expanded 340 basis points to 6% during the quarter. Total store REDcard penetration climbed to 14% from 9.5% in the year-ago quarter.

Target’s P-fresh remodel program, 5% REDcard Rewards program, Target/Neiman Marcus Holiday Collection and new Holiday Price Match will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. The company’s focus on “Expect More. Pay Less.” brand promise is also bearing fruit. Moreover, in order to expand its global footprint, the company is eying Canadian market with an expected entry in 2013.

Other Financial Details

During the quarter, Target bought back about 1.7 million shares at a price of $62.90 per share, aggregating $104 million, and also paid dividends of $236 million.

The company ended the quarter with cash and cash equivalents (including short-term investments of $800 million) of $1,469 million, total unsecured debt and other borrowings of $17,054 million and shareholders’ equity of $16,352 million.

Stores Update

Target currently operates 1,781 stores, of which 395 are general merchandise stores, 1,130 are expanded grocery assortment, 251 are SuperTarget stores and 5 are CityTarget stores.

Strolling Through Guidance

Target now projects adjusted fourth-quarter 2012 earnings between $1.64 and $1.74 per share. On a GAAP basis, including expenses related to the company’s entry in the Canadian market, management projected earnings between $1.45 and $1.55 for the quarter. The current Zacks Consensus Estimates for the fourth quarter is $1.50 per share.

Let’s Conclude

Target is persistently trying every means to keep afloat in an economy, which is still not completely awakened from the state of hibernation. 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 more focus on consumable items should boost sales and earnings in a sluggish 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.

The economy has not yet recovered fully. 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.

Moreover, a 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 Stores Inc. (WMT - Analyst Report) and Costco Wholesale Corporation (COST - Analyst Report), which are geographically diverse and more resourceful.

Given the lingering macro-economic concerns, we have a long-term Neutral recommendation on the stock. Moreover, Target holds a Zacks #3 Rank that translates into a short-term Hold rating. 

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