Target is betting on fresh foods and 5% discounts(70026)

With Growth and Income Target Could Be a Bull's-Eye

Over the past two decades, Target, the big Minneapolis-based discounter, defined the concept of cheap chic.

The strategy worked splendidly until the financial meltdown of 2008-09 when America headed for Wal-Mart, which offered even lower prices, and the heck with style. As customers fled, Target's sales and profits tumbled.

Now, though, Target has come up with a promising comeback plan. Two bold initiatives now under way -- rolling out fresh groceries in more of its stores and, starting this fall, offering 5% discounts on nearly all purchases made with Target REDcards -- should help a lot. So should the company's tight expense controls and strong cash flow.

On top of it all, Target investors are getting paid to wait. The company has paid dividends for 171 consecutive quarters, or more than 42 years, and lifted its quarterly payout by 47% in June, to 25 cents a share from 17 cents, for a current yield of 1.9%.

The shares rallied slightly in early August, helped by a report that same-store sales, or sales at stores open at least a year, rose 2% in July, even as the broader economy showed signs of slowing. If the company's merchandising and price promotions succeed in driving traffic and lifting profits, the stock could hit $70 in a year, versus about $51 recently.

"Consumers do not appear to be returning to their bunker of late 2008 and early 2009," Adrianne Shapira, a retailing analyst at Goldman Sachs, wrote in a recent report. Ms. Shapira rates the stock Neutral, with a price target of $55, but notes she is "warming up to the Target story," given the company's "unique top-line drivers that aren't dependent on a macro recovery."

In the aftermath of the recession, Target is focusing more on remodeling stores than on opening new stores. Central to the strategy is the introduction of PFresh, which adds meat, fresh produce and baked goods to an existing lineup of dry grocery, dairy and frozen-foods products.

"Target can offer prices 10% to 15% below the grocery store," says Stacey Brodbar, an analyst at asset manager W.P. Stewart. "It will be a home run if they can get customers to cross shop."

This fall, Target will start offering customers a 5% discount on nearly every purchase made via its REDcard program, which includes the Target Visa credit card and a Target charge card. Another good sign for the company is that its credit-card business, which has suffered under the weight of deteriorating receivables, has started to recover.

"Expect More, Pay Less" is one of Target's marketing slogans. At these levels, the same can be said of its stock.

Target is betting on fresh foods and 5% discounts

Related News

Photos

trade

market

finance