I described Target in January (read more) and since that share price is very volatile. It is not a common situation that share price of Dividend Aristocrat is going down by 20%, and that was the case with Target after financial results. What’s really happened?

First of all it should be emphasized, that Target is a second largest discount retailer in America and its’ business is very stable and diversified. When we look at financial results we can see that sales in under pressure – this is mainly due to sale of pharmacy business to CVS and Amazon growing in e-commerce (clients are shifting from traditional retail to a new one).

image001

On the other hand we can see that due to high buybacks EPS was not affected, which is definitely good (I do not exclude any one-offs). As it comes to guidance it is rather weak:

(…) we are planning for second-quarter comparable sales of flat to down 2%. This would represent slower than second-quarter performance than we were planning at the beginning of the year. But we believe this outlook is prudent given the trends we see, as many others have been seeing. Given slower-than-expected sales, we are planning for a moderate year-over-year decline in our second-quarter EBITDA margin rate in the range of 40 basis points at the midpoint of our comp guidance. Compared with our plan going into the year, our updated expectations reflect continued gross margin pressure from a very promotional environment, combined with a deleveraging of SG&A expense on slower sales. All together, we expect to generate second-quarter adjusted EPS in the range of $1 to $1.20.

As it comes to valuation:

P/E = 14.2

EV/EBITDA = 7.2

It is cheaper than Wal-Mart. Reminding from my last note: In my opinion it’s better to invest in WMT nowadays, but Target doesn’t look bad as well. I see that WMT should be traded with premium to Target – due to a bigger size and stronger market position. This has fully materialized.

 

Summing up, I like Target and I am considering swapping WMT on TGT. If Q2 results will be good for WMT and bad for TGT I think I will sell my WMT shares and I will buy TGT. For now no actions (I do not want to increase my exposition on this segment).

 

Disclaimer TGT – no position, WMT – long.