Target Corporation (NYSE:TGT), the operator of general merchandise and food discount stores in the United States, recently posted soft sales for the second consecutive month of second-quarter 2010.
 
After registering a growth of 1.3% in May 2010, comparable-store sales rose 1.7% in June 2010, but fell short of market expectation. However, comparable-store sales increased substantially from a fall of 6.2% in June 2009. Year to date, comparable-store sales climbed 2.3% compared with a fall of 4.7% in the same period last year.
 
By categories – apparel, food, healthcare and beauty reported robust sales. On the contrary, electronics, video games and music delivered sluggish sales. Target’s sales were hit hard during the downturn as cash-strapped consumers focused more on food and essentials rather than discretionary purchases, which usually carry higher margins.
 
Based in Minneapolis, Minnesota, Target said that net retail sales for June rose 4% year on year to $5,918 million, whereas year to date, sales climbed 4.9% to $25,698 million.
 
On account of the lower-than-expected sales results, 3 out of 22 analysts covering the stock lowered their earnings estimates for second-quarter 2010 in the last 7 days. However, the Zacks Consensus Estimate did not budge on the revision, and remained at 92 cents a share.
 
Despite soft sales results, favorable merchandise mix, effective cost management and growth across credit card segment indicate that the Zacks Consensus Estimate is achievable, and is reflected in the Zacks #2 Rank on the stock, which translates into a short-term ‘Buy’ rating.
 
Target’s strategic initiatives should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that increased focus on consumable items will boost sales in a sluggish retail environment. However, with the revival of the economy, the other merchandise categories are also gaining strength.
 
Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in international markets.
 
However, unfavorable consumer spending patterns and increased competition still remain concerns. Thus, our Neutral recommendation persists.
 
Target, which currently operates 1,740 stores in 49 states, faces stiff competition from Wal-Mart Stores Inc. (NYSE:WMT). The company operates through two business segments – Retail and Credit Card.

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