A Retail Stock Worthy of Your Portfolio
It's Christmas in July! At least it seems that way, with retailers in an endless price war to meet the demand for Black Friday-type prices every day of the year in today's market. For instance, recent price comparisons show Target (NYS: TGT) giving rival Wal-Mart (NYS: WMT) a run for its money with surprising price-cutting advantages on a selection of home goods. Target's clear edge over competitors such as Wal-Mart is its ability to offer more competitive pricing on designer brands and trends.
Bargain-shopping investors, rejoice
Target seems to understand that it won't be able to maintain momentum on price advantage alone. So what are the company's long-term plans to increase revenue? In January, Target purchased the leasehold interests of Zellers sites in Canada, with plans to open 100 to 150 Target stores in the Great White North during 2013 and 2014. The move to the Canadian market is a first for the retail giant, which currently sells only in the United States. In support of the future growth strategy, Target issued $1 billion worth of corporate bonds to fund the investment in these leases.
Good debt vs. bad debt
True, the higher the debt level, the more risk the company is taking. In this case, Target's weighted average cost of capital of 8%, compared with its return on invested capital of 10.6%, suggests that it is focusing more on investing in growth strategies than on near-term profitability. At a 10.6% return, the company is beating its cost of capital and creating value. A back-of-the-envelope discounted cash flow analysis suggests that Target could appreciate 73%, notably higher than Dollar Tree (NAS: DLTR) at 6% and Costco (NAS: COST) at 7%. It's my belief that this, paired with the strength of its brand, lends Target long-term power.
What it means for investors
Expanding into the international market is a great play that could mean rising free cash flow for the company. Last month, Target's comparable-store sales grew 4.5%, topping analysts' predictions. However, it appears June was a winning month for retailers across the board, with competitors such as Dillard's (NYS: DDS) , Kohl's (NYS: KSS) , and Macy's (NYS: M) sporting strong comps as well, with gains of 6%, 7.5%, 6.7%, respectively. But Target has an advantage moving forward: Its valuable branding and customer-loyalty initiatives sweep the competition by bringing polar-opposite positions of value and luxury together.
Investors can expect more and pay less
Target offers an automatic additional discount on every item at the time of purchase -- a smart move if you consider the value of repeat-purchase business. It's simple: Every time customers use a Target REDcard when shopping at a Target store or online, they get an additional 5% off every item purchased. This fosters customer loyalty, encouraging shoppers to continue coming back for more.
All things considered, my faith stands in Target's ability to deliver on its brand promise: "Expect More. Pay Less." That's not to say this is a risk-free move for investors -- Target's arrival in Canada exposes the company to foreign exchange rates as well as a new, albeit similar, market.
But over the past five years, Target has increased sales by nearly 5%. If you consider the future growth opportunities for Target on a five- to 10-year basis, its stock looks like a bargain. With its newest growth initiatives on track, I'm confident that Target will gain speed in Canada and beyond.
A bottom line for your bargain
Investors looking to lock in Black Friday-style deals in the months ahead should consider buying Target at its current bargain price. But if you're waiting to see how Target's expansion into Canada is received before deeming it a buy, go ahead and add the stock to your Watchlist so you can track its progress.
At the time this article was published Fool contributor Tamara Rutter owns no shares of the stocks mentioned in this story. Find out more about Tamara, or connect with her on Twitter, where she goes by @TamaraRutter.The Motley Fool owns shares of Costco and Wal-Mart.Motley Fool newsletter serviceshave recommended buying shares of Costco and Wal-Mart and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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