3 Reasons Target Is a Better Retail Stock Than Walmart or Costco

This retail giant just scored a stellar earnings report that gives it considerable momentum in a holiday shopping season that shows every sign of being prosperous.
By Chiradeep BasuMallick ,

Discount retailer Target (TGT) - Get Report is on a roll, and it should do very well during the coming holiday shopping season. The company delivered turbocharged third-quarter results that bode well for 2016.

The company met Wall Street's estimate with its earnings per share of 86 cents, but its revenue and same-store sales results topped expectations. Perhaps more importantly, the company raised its full-year earnings forecast for the second time in just three months, according to CNBC.

Even so, this stock is also trading at less than 14 times estimated earnings per share for the next 12 months, according Yahoo Finance. That makes it a bargain compared to its peers. Let's take a look.

In terms of valuation, Target stock is cheaper when compared to larger rivals like Wal-Mart (WMT) - Get Report (above 14.5 times) and Costco (COST) - Get Report (25 times) on a future earnings basis.

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Analysts also predict much faster growth for the company. For instance, in the next five years, Target is estimated to push its earnings-per-share (EPS) by nearly 10% compared to a measly 2% by Wal-Mart and 8% by Costco. Dividend yields offered by Target pack a strong punch as well -- at above 3%, it's in line with Wal-Mart and way ahead of Costco's paltry 1% yield.

The recent earnings scorecard reflects Target's ability to not only fulfill expectations but also exceed them. In the third quarter, comps inched up 1.9% (at the high end of the management's guidance from August). This was better than even Wal-Mart's 1.5% comps improvement.

Customer traffic rose by 1.4%. The company's high margin signature business grew at 2.5 times the company average. EBIT margins rose to 5.5%. E-commerce sales were up 20%.

A particular standout was its toy category, part of the signature Kids division, which matched its second quarter growth with another 12% comp sales increase this quarter.

In the overall food category, for the first time this year, third quarter comp sales growth outpaced comp sales. In the fourth quarter, the company expects to deliver a comparable sales increase of 1%-to-2% (driven by a rapid digital growth-rate of about 20%).

Target is also equipped to manage change and development, constantly adapting to its successes and failures. The company will close 13 stores on January 30 as part of a broad aim to reduce square footage strategically. Target's already closed 11 stores in the U.S. and 133 in Canada this year, while also adding a clutch of small-format stores.

In the third quarter, the company spent $942 million buying back its stock, bringing its repurchase spending up to $2.2 billion for 2015 (there were zero repurchases in the same period for 2014).

Given its long-term plan to generate profitable expansion, Target's management is committed to retiring shares, which is a productive use of cash. Under its current $10 billion share repurchase program, the company has retired more than 77 million shares, representing more than 12% of the current shares outstanding at an average price of less than $69.

Target's after tax return on invested capital or ROIC was a very healthy 13% for the trailing 12 months through the third quarter. This is nearly two percentage points higher than last year (when its business results were under pressure following a data breach).

The way things stand now, Target should continue to boost these numbers, with its focus on hitting 15%-18% growth over the next five years.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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