Target (TGT) reported fourth-quarter results Thursday and rounded off a strong 2011 that showed the best annual comparable-store sales growth since 2007. We’re sticking with our fair value estimate for Target.
Target’s sales advanced 3% in the fourth quarter thanks to a 2.2% increase in US retail comparable-store sales offset by a nearly 9% reduction in credit card revenues. For the quarter, the company experienced a 0.4 percentage-point increase in the number of transactions and a 1.8 percentage-point increase in the average transaction amount. The pace of comparable-store sales, however, lagged the 2.4% increase achieved during the same period a year ago. Management noted that such performance was below internal expectations, as well, due to higher promotional activity during the holiday season. Still, Target continues to do a good job with REDcard penetration (the percentage of Target sales that are paid using REDcards), which advanced 3.4 percentage points, to 10.8%, at the end of January. The company expects continued penetration based on trends in certain markets (namely
In the quarter, the company’s net earnings dropped over 5%, to $981 million, as cost of sales (due to promotional activity) and overhead expenses advanced at a faster pace than sales growth. On the operating line, performance dropped over 4% and higher net interest expense offset a lower provision for income taxes, causing the outsize net earnings decline. US retail segment operating earnings increased over 1% in the quarter, and despite the pricing pressure, most of the net earnings decline, in our opinion, was driven by start-up investments related to its Canadian operations, which lost $40 million in the quarter (Target expects to enter
Looking ahead, Target expects adjusted earnings per share to be between $0.97 and $1.07 in the first quarter of 2012 and be in the range of $4.55 to $4.75 for the full year on the heels of the opening of 15 to 20 net stores. Including costs related to its Canadian entry, the company expects earnings per share in the range of $4.05 to $4.25 per share, lower than consensus expectations. We think such performance is achievable and remain encouraged by the company’s success related to its remodeling efforts and 5% Rewards loyalty program (its REDcard rollout).
We’re also looking forward to the company’s expansion in
On its conference call, management attempted to explain to the analyst community how to value its company. We’re typically skeptical when a company does this, and we have reproduced their comments below:
“I’ll leave you with one final thought regarding our valuation. Many of you directly incorporate our near-term Canadian — reported Canadian losses into a PE analysis of Target. To be clear, this makes no sense to us. Even if our future Canadian profitability were to fall short of our expectations, it’s almost certain that we’ll enjoy some amount of income once preopening expenses are behind us late next year. Our view is that a valuation analysis of Target today should begin with an assessment of the value of our U.S. business segments, which we estimate will earn between $4.55 and $4.75 in 2012 and which we believe are likely to grow on average 9% to 10% per year for many years to come, inclusive of the benefit of significant and growing ongoing share repurchase…
…On top of that