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Target Upgraded to Neutral

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Buoyed by Target Corporation’s (TGT - Free Report) better-than-expected adjusted earnings for third-quarter fiscal 2013, we upgraded our recommendation to Neutral on Dec 5, 2013. The stock currently carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Target posted adjusted earnings of 84 cents a share that came ahead of the Zacks Consensus Estimate of 62 cents. The quarter reflects disciplined cost management and effective execution of strategy. However, quarterly earnings dropped from 90 cents delivered in the year-ago quarter.

Total revenue climbed 1.9% to $17,258 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $17,541 million.

Management trimmed its fiscal 2013 earnings forecast indicating flat U.S. comparable-store sales projection for the fourth quarter. For fiscal 2013, management trimmed its outlook and now anticipates adjusted earnings between $4.59 and $4.69 per share, excluding dilution of 95 cents to $1.05 due to its entry into the Canadian market. Earlier, the company had projected adjusted earnings in the band of $4.70 to $4.90 per share. However, Target expects the Canadian operation to start contributing in fiscal 2014.

We expect footfall to be challenging this holiday season given the headwinds such as higher payroll taxes, sluggish economic recovery and e-commerce competition.

To mitigate this, the company is focusing on consumable items, concentrating more on store renovations and enhancing store sales productivity and digital capabilities, introducing smaller format stores, and eyeing opportunities in international markets. We believe Target’s 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.

Other Stocks to Consider

However, until any further upward revision in the Zacks Rank on Target, other better ranked stocks worth considering in the retail sector include The Hain Celestial Group, Inc. (HAIN - Free Report) , PriceSmart Inc. (PSMT - Free Report) and The TJX Companies, Inc. (TJX - Free Report) all sporting a Zacks Rank #2 (Buy).

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