Target actually got its start as a department store retailer in the early 1900s, but changed its format to discount retailing in 1962. The model worked, and today the company is a growing multinational chain whose customers are just as brand-loyal as Wal-Mart’s.
But the companies have some subtle differences: Target is much smaller in scale — at roughly 2,000 locations across the U.S. and Canada vs. Wal-Mart’s 8,500 in 15 countries, which doesn’t count its Sam’s Club stores — and in market cap, as its value of $42 billion is roughly a sixth of WMT’s. And although it offers discounted merchandise by the cartload, the pitch is more upscale in terms of shopping experience and what consumers can expect in the stores.
Being smaller also helps Target turn the ship in different directions: It is nimble and innovative. Being late to the party (as opposed to Wal-Mart) in bringing groceries and produce to its stores didn’t stop Target from introducing the “PFresh” initiative, which today is the company’s fastest growing segment.
More innovative thinking: With bricks and mortar costing a lot of money, and e-tailers like Amazon (NASDAQ:AMZN) cutting into sales, Target introduced smaller stores in city locations. The TargetCity concept was rolled out in Chicago and Los Angeles to great reviews, and at half the size of a typical Target store, the price is right. Discounts through the company’s “REDcard” program are bringing new customers into stores.
All of which leads to a great Q2: Although earnings were flat for the quarter, they came in ahead of estimates, and the company raised its earnings outlook on both the top and bottom lines. Same-store sales rose 3%, and the number of shoppers using the REDcard for purchases increased from 8.7% to 12.8% — though the discounting did weigh on margins.
Like Wal-Mart, Target is trading near 52-week highs, and the dividend yield of 2.26% is also close. Target has paid a dividend since 1965 and is a Dependable Dividend Stock, and that won’t change anytime soon. It’s a little cheaper on a price-to-earnings basis, at 14.5 times trailing earnings and 13 times fiscal 2014 earnings.
TGT shares haven’t been nearly as explosive as WMT, gaining just 20% in the past couple years, but the company is expected to keep growing profits at double digits, which would be a faster rate than Wal-Mart.
Going ahead, Target’s expansion into Canada is an important undertaking. The move started in 2011, with store locations to include every province in the country, and a headquarters in Ontario. The expansion costs hurt in the short term, but the venture is expected to be a prime driver of earnings into the future, starting as early as next year.
Great thinking, eh?
Yes, these guys compete head-to-head, but on a more different scale and for more different consumers than many might realize. Like I said up front, you won’t find me in either anytime soon, but I like Target’s long-term potential, particularly if the economy picks up any kind of consistent steam.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he did not hold any of the aforementioned securities.