is so confident that its holiday commercials feature its red and white bull's-eye logo -- without mentioning its name.
But the Target name is coming up a lot on Wall Street lately. By marrying the seemingly antithetical concepts "discount" and "chic," Target has carved itself a niche in the no-man's land between traditional department store chains and discounters. Owing to its upscale clientele's willingness to pay for quality, Target is already far more profitable than its competitors. And with recession eating into traffic and profits at upscale retailers, Target is poised to gain market share just as it steps up its expansion.
Indeed, just as many investors this year have
come to prefer home improvement chain
, some are now touting Target as the growth story among discount retailers. That could make its shares a good bet in coming months.
Target has a number of advantages over its discount rivals. Other discount retailers -- even giant
-- don't make as much money on each sale. Target's gross margins for 2001 are expected to come in at 30%, compared with 21% for Wal-Mart and
, according to Sanford Bernstein's Emme Kozloff.
And unlike the retail leaders of recent years, such as Wal-Mart and Home Depot, Target has plenty of room to grow before it risks having its markets "saturated" by too many stores. By offering high-quality products at a reasonable price, Target appears to define value for many shoppers.
"With Wal-Mart, it's a saturated market, there's not much opportunity for growth going forward, and you're paying a higher multiple," says Robert Shoss, who co-manages AIM Management's $375 million large-cap growth fund. The fund has owned Target shares since its inception three years ago and began buying more in recent weeks. It doesn't own shares of Wal-Mart.
This is a bet that has paid off for investors this year: Shares in Target are up about 21% on the year, while Wal-Mart has risen just 6%. Kmart, meanwhile, had a nice run earlier this year but has since fallen as the company's
turnaround hopes have faded.
Yet even after this run, Target shares are still cheap relative to Wal-Mart, some analysts are saying. Target shares trade at 22 times next fiscal year's estimated earnings, compared with 32 at Wal-Mart, according to Thomson Financial/First Call.
Source: Sanford Bernstein
The chorus of Target boosters on Wall Street appears to be growing. Walter Loeb, a longtime retail consultant, in his most recent monthly newsletter, the
Loeb Retail Letter
, told clients that Target shares have more growth potential than Wal-Mart's.
Of course, Wall Street isn't unanimously bullish on Target. Ladenburg Thalmann's Eric Beder, for one, scoffs at the notion that Target is undervalued. He says Target is expensive because it trades at a premium to its growth rate. "Wal-Mart has its own cult that makes it overvalued," he says. "We do not believe paying up for Target in the short term represents a strong investment." (He has a hold rating on the stock, and his firm doesn't have a banking relationship with Target.)
Others say the company could be at more risk during a recession because it relies on more cutting-edge, private-label fashion, which helps margins in good times but could make Target vulnerable when fashion tastes turn more conservative, as some experts say is happening.
But perhaps the biggest turnoff for the bears is the company's ambitious credit business, particularly its plan to launch its own Visa card. "To me the credit card business increases the risk to the company," says Beder.
But some observers say the risks may be overstated. "The credit business can be a very profitable business if you handle it properly," says Kurt Barnard, a retail consultant who publishes
Barnard's Retail Trend Report
, an industry newsletter.
Target's aim is to convert top Target credit card holders into Target Visa cardholders, not "an aggressive new solicitation into the subprime market," says Wayne Hood, who covers Target for Prudential Securities. He acknowledges that some have worries that getting deeper into the credit business amid a recession is bad business, but, he says, "we are less concerned."
Analysts expect earnings at Target and Wal-Mart to grow at roughly the same rate -- 15% for Target, 14% for Wal-Mart. But Hood says Target's estimates don't factor in an expected boost from credit operations. He figures the credit business could add 10 cents, or about 6%, to next year's EPS estimate, $1.68. As for Wal-Mart, he mentions in a recent report that while its
comparable-store sales have been solid, they are coming at the expense of gross margins. (He has a market outperform rating on both stocks, and his firm does not do investment banking.)
Meanwhile, operating profits at the core Target Stores division jumped 15% in the third quarter, compared with just 4.8% at Wal-Mart's core Wal-Mart division.
"Target is doing extremely well," Barnard says. "I look at it in a very favorable light."