Hitting the Right Target

NEW YORK ( TheStreet) -- Target ( TGT) shares are up 15% so far this year, and as much as 8% since the company reported its fourth-quarter earnings.

Although there were concerns that rising payroll taxes would hamper growth, the concern subsided after the earnings report. Whether or not they re-emerge is secondary to what Target has become in terms of operational efficiency. Target is no longer just an "upscale version" of Wal-Mart ( WMT).

The company's recent improvements have demonstrated a commitment towards finding that next leg of growth. Investors seem pleased with the progress. However, with the stock posting new highs and mere percentage points from its 52-week high, it's worth asking how far should Target be chased.

It was thought the end of the payroll tax holiday on Jan. 1 would cause consumers to start spending less. Wal-Mart noticed a slight pullback. These consumers may have gone to Target instead.

Target's efforts to win customers back with price guarantees seem to be working. The company promises if a shopper buys something at one of its stores it will match the price if the same item is found cheaper online at a number of retailers, including Amazon ( AMZN). Fourth-quarter numbers suggest this strategy is working better than expected.

The company posted a 7% increase in revenue for the fourth quarter, which arrived at $22.73 billion and met the Street's expectations. Comps for the quarter, weren't that great at 0.4%, which declined from 2.2% a year ago, and lower than the 1% posted by Wal-Mart. However, for the year Target posted comps of 2.7%, which is just a 0.3% decline year over year.

By contrast, J.C. Penney ( JCP) just posted a 32% year-over-year decline in comps, which arrived 6% worse than estimates.

Target's revenue growth still outpaced Wal-Mart's 3.9% although Target's overall number of transactions fell by 1%. Target made them all count as the amount per transaction increased 1.4%.

That said, profitability was a bit mixed as gross margin was impacted by increased markdowns. Target still managed to earned $961 million, or $1.47 per share, which was enough to meet Street expectations. When removing certain costs related to investment in its Canadian stores, earnings were higher at $1.65 per share.

Thinking Big

Target wants to feed the Street's growth appetite, and it believes Canada is the perfect place to start. Despite already operating 1,778 U.S. stores, Target said it plans to open 24 stores in Canada by early April. Management said this will be the "first wave" of five that will begin its goal to open as many as 124 stores by the end of the year. This is in addition to opening up as much as 15 to 20 new stores in the U.S.

These are strong expansion objectives and investors are anxious to see how they're going to play out. These will go on as Target continues the redesigning of its stores to further separate itself from Wal-Mart. The company figures if the payroll tax is going to impact consumers, it will likely not be as big of a blow to the more affluent shopper, which is one of the reasons why Target has partnered with upscale designers like Neiman Marcus.

Since Wal-Mart and to some extent J.C. Penney are already struggling with slower foot traffic, Target can offset this weakness with an increased amount per transaction. Why not? This strategy worked in the fourth quarter. In the meantime, I'd like to see Target raise the bar on more international expansion, particularly in areas like China and Mexico where Wal-Mart is currently king.

Bottom Line

Target's doing all the right things and the stock seems fairly valued. Even at its 52-week high these shares can still climb as long as the company continues to post monthly sales reports showing decent comp progression. While it's not yet clear that Target is really taking share from Wal-Mart due the payroll tax increase, the potential is there. And so is strong leadership.

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

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.