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Target (NYSE:TGT) report: Socks and undies for Christmas

Contributed by Fat Prophets

Wary consumers will have to be enticed into stores this coming holiday season with all manner of promotions and discounts. But retail executives are not as despondent as consumers seem to be in the lead up to the most important sales season of the year. Target’s Chief Executive Gregg Steinhafel does not believe it will be a “socks and underwear Christmas” as purported by a rival executive at Walmart.

Target’s monthly sales results have maintained a steadily improving trajectory for most of the last year. September sales were 3.2% ahead of the same month in 2009 and up 1.3% as measured on a same store basis. Year to date sales are 4.3% ahead of the same period last year and up 2.1% on a same store basis.

 
The comparison isn’t particularly exciting when considering the dire state of retail sales throughout most of 2009. Between around November 2008 and November 2009, retail sales across the US were truly awful as consumers avoided spending on unnecessary purchases. Discretionary retail companies felt the brunt of this wave of withdrawal and used the time to reduce inventories and lower operating costs as much as possible to maintain profitability.

The key economic factors of employment and consumer sentiment have struggled to improve throughout this year. As a consequence, while retail sales are certainly improving, they are doing so mainly due to sustained promotional work by the companies. This trend will feature heavily as the Christmas holiday season approaches.

The most recent back-to-school sales season replicated last year’s phenomenon where consumers delayed purchases hoping for bigger discounts as the sales period came to a close. The outcome was that September retail sales increased by 2.8% for US retailers.

With moderate sales growth now becoming the modus operandi for all retail businesses, companies are faced with a different operating environment to past holiday seasons. Early promotion of approaching deals and specials is becoming the weapon of choice to ensure foot traffic through stores remains robust. Target has had reasonable success with this metric for some months now which provides a basis for the next step of parting consumers with their money.

The company has just announced a 5% discount for its REDcard holders both in-store and online. The discount also applies to Target credit card, Visa card and debit card holders. The push offers a 5% discount coupon for a return visit if customers fill five prescriptions at a Target pharmacy.

Retailers have already placed their orders from suppliers for the Christmas season. The country’s largest import cargo port in Los Angeles recently noted that container imports peaked in July and August this year, whereas they were virtually stagnant at the same time last year. The conclusion from that observation is that retailers may have ordered goods early, hoping to secure better prices. The danger of doing so is that the amount of inventory as well as the choice of stock needs to be accurate to avoid a poor sell-through in the stores. Buying early also increases inventory holding costs.

But despite the nervousness pervading the retail industry, the basic goods retailers such as Target are quietly confident that the efficiency initiatives undertaken over the year, combined with the sharper focus on inventory levels will serve to generate acceptable profit growth. Target underlined this confidence by increasing its quarterly dividend to 25 cents per share.

On consensus earnings forecasts, Target is trading on a forward PE of 13.9 times for 2011 then 12.3 times in 2012. Importantly, the market also expects operating margins to be maintained around 8% indicating the company has tight control of its operations. The company’s share repurchase scheme also provides further earnings support. Target acknowledges it has more cash than it needs and remains committed to returning the excess to shareholders in a tax efficient manner.

Looking at the weekly chart of Target we can see that the price action is trading sideways having broken its uptrend support. The 39 week/ 200 day moving average looks to be providing good support while the 200 week MA provides a second level of support in the event of a deeper pullback. The weekly MACD has generated a bullish trend signal which suggests we may see a move higher to test the $60 resistance level.

Taking a closer look at the daily chart of Target we can see that the price action is above both the 50 and 200 day moving average which have just completed a bullish "golden cross". The daily RSI is currently at 53 which still leaves plenty of potential upside before we see an overbought reading. The $53 level should provide support on a pullback but we think a move higher towards $60 is more likely.

We continue to like the position Target occupies within the US retail sector. Despite the soft sales record and still weak consumer sentiment, Target is well positioned to benefit from improvements in retail sales at the basic end of the retail industry.