National Post (National Edition)
Analysts like Target’s move north
Expansion here just one of many growth catalysts
s Canadian launch has the country’s frugal fashionistas buzzing, but it is investors who may benefit most from the U.S. retailer’s expanding North American footprint.
Target opened another 17 stores across Ontario on Tuesday and will open four more next week as it continues its soft launch across the country. The superstore opened its first three locations north of the border two weeks ago and plans to open a total of 124 stores countrywide this year at a cost of about $1.5-billion.
Fears about the superstore’s international expansion weighed on the stock last year, but it has been on an impressive climb of late, rising 15.5% since Dec. 28, 2012, to close Thursday at US$68.05. It could move even higher if the company’s growth strategy goes to plan, analysts say.
“Shares of Target continue to offer a favorable risk/reward due to an attractive valuation and several earnings growth drivers,” said Sean Naughton, an analyst at Piper Jaffray & Co., in a note to clients. “We remain bullish on the opportunity in Canada with early reports of high demand at newly opened pilot stores.”
Mr. Naughton reiterated his overweight rating and US$74 price target on the stock, saying the next 12 months could offer up to 15% or more in total return for investors.
He expects Target to do well in Canada despite a crowded marketplace that includes U.S. retailing giant Wal-Mart Stores Inc. as well as homegrown stalwarts such as Hudson’s Bay Co. and Canadian Tire Corp.
“The stores are in high traffic areas and fill a white space for trend-right and moderately priced apparel and soft home [wares],” he said.
Mr. Naughton believes the Canadian stores could contribute almost US$2.2-billion in sales in fiscal 2014 and US$4.1-billion the year after.
But he believes Target’s Canadian expansion is just one of several catalysts for investors. The others include the company’s growing cash hoard, which should result in accelerated share repurchases in 2014. Free cash flow could climb to US$3.6-billion in 2015 from US$1.1-billion this year due to declining capital expenditures and higher cash from operations, he said.
The US$5.9-billion sale of Target’s credit card division to Toronto-Dominion Bank in October is also positive for investors, Mr. Naughton said, as is the company’s fledgling loyalty program.
“We believe the 5% REDcard Rewards program can contribute 100 basis points more to same-store sales on a sustainable basis as long as the year-over-year penetration continues to rise at a 300-500 basis point rate and new cardholders increase their annual spending in the neighborhood of 50%,” he wrote.
In addition to Mr. Naughton, 18 other analysts also rate Target shares a buy or overweight opportunity, while nine consider it a hold.
David Schick, an analyst at Stifel Nicolaus & Co., is one of the cautious set and recommends investors stay pat for the time being. He said 2013 has several significant question marks that create potential headwinds for the stock.
In particular, he is concerned that investments in both REDcard and PFresh, Target’s grocery concept, have not driven expected levels of traffic. And, despite initial success in Canada, continued strong performance later in the year is far from certain.
“Opening 124 converted stores over just a few months in a new market is a major task,” he said.
Others, however, suggest Target will ultimately succeed as planned in Canada over the long run.
“Until now, Canada has lacked a national retailer in Target’s market space, which is positioned above Walmart, yet below The Bay or Sears,” said Greg Newman, a portfolio manager at The Newman Group, a Scotia MacLeod subsidiary in Toronto. “Canadian consumers may be drawn to Target and the company’s guidance of EPS growth may prove correct.”
Beyond the Canadian opportunity, Mr. Newman believes
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CORE CUSTOMERS BY INCOME LEVEL SHOPPING FREQUENCY AMONGST TARGET AND WALMART SHOPPERS Target will benefit from the improving U.S. housing market and resurgent U.S. consumer.
He also likes the company’s current valuation. Trading at an average price/earnings ratio of around 13.7 times its estimated 2013 earnings, the stock is slightly cheaper than the broader S&P 500, which trades at 14x, and Walmart’s 15.1x.
“If Target’s management is correct about their 2014 EPS growth and beyond,” Mr. Newman said, “then paying an average market multiple sounds like a good entry point to me.”