General merchandise retailer Target (NYSE: TGT), which recently changed its name from Dayton Hudson, hit the mark with its fiscal fourth-quarter and full-year earnings report this morning.
Net earnings (excluding unusual items) grew 15% to $522 million, or $1.12 per diluted share, compared to $453 million, or $0.97 per diluted share, a year ago. It's the fourth consecutive year the company has grown earnings more than 20%, in line with the Minneapolis based company's goal of growing earnings at least 15% annually. Target beat estimates by two cents, according to First Call/Thomson.
Earnings aren't the end-all be-all investors should focus on, by any stretch, but in combination with strong cash flow, good debt management, and proper investment for future growth, Target's earnings indicate management knows how to find the bull's eye.
Unfortunately, revenue levels slipped from last year's pace. Fourth-quarter sales increased 8.7% to $10.9 billion, compared to last year's 13.2% climb. Full-year sales increased 9.9% to $33.7 billion, compared to an 11.5% jump the year before.
Target operates a chain of retail stores under the names Dayton's, Hudson's, Marshall Field's, and Mervyn's, but its flagship operation is the Target concept, an upscale discount retailer that fits into the general merchandise food chain somewhere between Wal-Mart and Federated Department Stores(NYSE: FD). Target stores account for almost 80% of total revenues and 80% of pretax profit.
This is probably why investors didn't react too strongly to the company's fairly anemic 3.5% comparable-store sales growth for the fourth quarter. For the most part, investors are focused on Target, which boosted Q4 comps by 5.6%. This isn't as impressive as Wal-Mart's(NYSE: WMT) recent earnings report, but it's still solid. The world's largest retailer reported fourth quarter comps of 6.3% overall (including Sam's Club), and 6.4% for Wal-Mart outlets.
It's safe to say that any general merchandise retailer has to differentiate itself from Wal-Mart, and Target has done a good job finding a niche in the higher end of the discount category. For example, it sells the higher-end Calphalon line of cooking products and advertises in magazines like Vogue and Bon Appetit.
Check out the difference in the companies' gross margins for a top-down view of two different retail strategies. For the year, Target reported gross margins of 32%, up from 31% a year ago, while Wal-Mart reported gross margins of 21%. Clearly the companies operate in different segments of the retail industry. Nevertheless, both seek to increase gross margins every year and it's an important measure of profitability for investors to track. Wal-Mart, in fact, recently managed to increase its gross margins despite price roll-backs that are a critical piece of the company's philosophy.
High gross margins aren't the only way to make money, however, especially in the retail industry. The second half of the profitability equation is return on assets, and one way to measure it is the total assets turnover ratio (sales / average total assets). Wal-Mart gets the edge in this category, with a 1999 ratio of $2.74 compared to Target's $2.05, meaning Wal-Mart generates $2.74 in sales for each dollar of assets. Target's ratio has been moving up pretty steadily and remains strong. It stood at $1.93 in 1996.
It's inevitable, in my opinion, that Wal-Mart and Target will increasingly compete with each other, which will make things tougher for Target down the road. Both companies, for example, are pushing the supercenter concept, which combines discount stores and full-size grocery stores. But with strong fundamentals, an established name, and a defined retail niche, it's worth taking a stroll down Target's aisles. The company trades a trailing P/E around 23, compared to 37 for Wal-Mart and 31.7 for the S&P 500.
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