Tempted to Buy Target

NEW YORK ( TheStreet) -- The other day I asked a savvy friend what stocks he's interested in owning. Without hesitation he said, "I have a short list, and Target ( TGT) is at the top of that list."

He already owns many of the best-in-breed companies, and he's married to a financial analyst, so he's not someone who just fell off the turnip truck on the way to the market. "Target knows how to compete in a cost-effective way," he enthusiastically reminded me.

"They're carefully expanding into areas of the country like Santa Barbara, Calif., where there's plenty of demand and their kind of demographic base," he added. "They know what they're doing and how to execute on their business model".

That's when I decided to look carefully at Target's key financial statistics and plans to reward shareholders.

First, I had no idea how long TGT has been around. Target was founded in 1902 and is headquartered in Minneapolis.

It offers full-time employment to over 365,000 people. As of Wednesday, the company operated 1,781 stores in the United States. It also has an online presence through its Web site, Target.com. The company distributes its merchandise through a network of distribution centers, as well as third parties and direct shipping from vendors.

Additionally, it offers credit to guests through its branded proprietary credit cards, the Target Visa Credit Card and the Target Credit Card, as well as through its branded proprietary Target Debit Card. You should take a look at its easy to navigate Web site and begin at the investor relations page.

There you'll find monthly sales summaries, dividend and stock split history, and important news, like the fact that Target is opening its first Canadian stores in 2013. The CEO message box is a must-read. CEO Gregg Steinhafel shares Target's philosophy on the connection between strong communities and a healthy business.
"When Target opened in 1962, we believed we could build a sustainable business that strengthened communities for the long term by continually anticipating the consumer needs of the moment. And today, 50 years later, our commitment to that ideal is as strong as it was on opening day", the CEO message reports.

"Central to our management philosophy was the belief that our business could benefit communities, and that strong, healthy communities would be essential to lasting business success."

The importance of this approach is paying off in the profitability of both the company and the stock price.

Target's trailing-twelve-month (TTM) operating cash flow is a healthy $5.57 billion on annual revenue (TTM) of $71.34 billion. The 2.3% dividend is sustainable as it comes from a relatively low payout ratio of 28% of the company's earnings.

TGT's next quarterly earnings report is on Nov. 15, so there's still time to digest the last quarterly earnings figures, which were just so-so. The company's 7.43% operating margin could stand improvement, but return on equity (TTM) of 19% compares favorably with its biggest competitor, Wal-Mart Stores ( WMT), which has a 23% return on equity. WMT's operating margin is only 5.94%.

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Recently, Target announced it will match the online prices of some competitors' in what is turning out to be the beginning of "...a fiercely competitive holiday shopping season", according to a recent article in The Wall Street Journal.

That article pointed out, "Like Best Buy ( BBY), which last week announced similar plans, Target is seeking to combat 'showrooming' by shoppers who check out products in its stores but buy them on competitors' websites, often at lower prices."

Target's CEO Steinhafel said recently he's not concerned that price-matching would dent the company's profit margins. "We're already rock solid in price. But if periodically some competitor has a lower price, this gives our guests the ability to know 'I can do all of my one-stop shopping in Target.'"

Since the lows in early 2009, the stock price has more than doubled, as the chart below illustrates. You can also see the dramatic growth in the revenue-per-share (TTM) that accompanied the stock's rise. TGT Chart TGT data by YCharts

The company's corporate philosophy, which is echoed in the company's CEO Web site message, has been expressed anecdotally by both customers and civic leaders in communities where TGT has opened stores. What the CEO publicly proclaims, if abided by, will galvanize a customer loyalty that has worked for decades.
"A distinguishing feature of Target's growth and success is that they come from serving our communities, through a business that makes it easy, affordable and fun for guests to find food and everyday essentials, high-quality apparel and home goods, and products and services that support health and wellness and help guests lead more eco-friendly lives," the CEO wrote.

"These are building blocks for community strength and stability -- and being able to provide them year after year, in unique and exciting ways, is the best job in the world. But, to do this sustainably, we cannot do it alone. We need business, community and civic partners around the world who share and inform our principled approach."

How refreshing to see and hear that any big-box retailer is taking a "principled approach" in the way it does business and serve the communities where it has a footprint. It's also good to read this article during a time when the stock market is having a bit of a time-out.

Target shares closed Friday at $62.23, down over 1%. Fortunate and patient investors may see a retest of the Oct. 11 intraday low of $61.22. The analysts' one-year consensus target stock price estimate is above $69. With a 2.3% dividend, investors could experience a rewarding total return -- Target style!

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Make smarter trading decisions and provide investment ideas that could help make you richer. Bryan Ashenberg does the dirty work so you don't have to!

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