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Does Target's Efforts Place the Stock Favorably for 2018?

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The year 2017 can be characterized as the one in which brick-and-mortar retail faced its gravest challenges. Even as stores shuttered and a swathe of mall closures ensued, industry occupants responded to new challenges through a variety of initiatives. What finally emerged was a new online-offline model. No wonder Target Corporation (TGT - Free Report) is trying all means to rapidly adapt to the changes in the retail ecosystem.

A Background

Shares of Target did come under pressure following third-quarter fiscal 2017 results.  Despite a positive earnings surprise, investors remained concerned about the year-over-year decline registered in the bottom line and management’s commentary about highly competitive environment in the fourth quarter.

The company also did not provide an encouraging earnings outlook for the final quarter due to increased spending related to stores, lower pricing and higher wages that are likely to weigh upon margins.

But Target has taken steps that have improved prospects in a big way. The company’s initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores bode well. These are going to play a major role in 2018.

Efforts to Overcome Impediments

Target intends to deploy resources to significantly develop online platform as well as store facilities to make shopping more convenient for customers. Further, it intends to launch 12 new brands across signature categories. The company plans to expand merchandise assortments with special emphasis on Style, Baby, Kids, and Wellness categories that are performing well.

This general merchandise retailer recently launched curbside pickup program, at 50 Twin Cities stores. This program gives customers an option to get ordered items without leaving the comfort of their cars. It has also rolled out Target Restock program that allows customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge. Further, in order to improve supply chain and expand delivery capabilities, the company had acquired Grand Junction.

To tap digital sales this holiday season, Target strengthened relationship with Google by allowing customers nationwide to shop through Google Express, including voice-activated shopping. Target has also made a concerted effort on the front of same-day delivery services by acquiring internet-based grocery delivery service Shipt for $550 million.

As a result of these, comparable sales in the combined November/December period rose 3.4%. Healthy store comps, robust traffic and sturdy digital sales can be cited as the reason behind the company’s spectacular performance. Comparable sales across core merchandise categories Home, Apparel, Food & Beverage, Hardlines and Essentials were positive.

Management now projects fourth-quarter fiscal 2017 adjusted earnings in the band of $1.30-$1.40 compared with the prior range of $1.05 to $1.25 and envisions comparable sales growth of approximately 3.4%.

Stock Vs Industry

Shares of this Zacks Rank #3 (Hold) have surged 33.9% in the past six months, compared with the industry’s growth of 30.2%. Further, the stock’s VGM Score of A portray its inherent strength.

But can Target offer investors better upside in the days ahead? A brief glance at some valuation metrics seems to indicate that this might just be the case. Target with a price to sales ratio of 0.5 compared with that of industry’s 0.8 indicate that the stock has enough upside potential. The stock also looks attractive with respect to a forward price-to-earnings (P/E) multiple of 14.8x versus industry’s 21.1x. A more-or-less similar picture emerges when comparing EV/EBITDA ratios. Target holds the edge here with an EV/EBITDA ratio of 6.7 lower than 10.5 for the industry.

Key Picks

G-III Apparel Group, Ltd. (GIII - Free Report) delivered an average positive earnings surprise of 6.1% in the trailing four quarters. It has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ross Stores, Inc. (ROST - Free Report) delivered an average positive earnings surprise of 5.5% in the trailing four quarters. It has a long-term earnings growth rate of 10% and a Zacks Rank #2 (Buy).

Wal-Mart Stores, Inc. (WMT - Free Report) delivered an average positive earnings surprise of 2.2% in the trailing four quarters. It has a long-term earnings growth rate of 6.1% and a Zacks Rank #2.

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