Target store

Analysts maintained their ratings on Target Corp. following a strong second-quarter performance that revealed strength in its core catgories, and in particular apparel.

Standard & Poor’s Ratings Services left their rating unchanged, noting the retailer’s results were in line with the firm’s expectations. “Profitability benefited from traffic growth and particularly strong comparable sales from signature categories, which grew three times faster than the company average,” the analysts reported. “Gross margin improved 50 basis points in the quarter, amid a favorable merchandise mix and reduced markdowns.”

The ratings firm expects only a “modest margin improvement” due to Target’s new merchandising strategies, which include doubling down on core categories while tweaking its food offerings. The firm sees comparable-store sales rising 2 to 3 percent for the year.

Target’s $1 billion return to shareholders is a big plus to the company’s rating profile, as is the recent $67 million settlement with Visa, which relates to a 2013 data breach. Also boosting Target’s profile are recent management changes that include a new chief financial officer and a newly created chief operating officer position.

In a separate report, analysts at Telsey Advisory Group said the company “is firing on all cylinders.” The analysts said Target is seeing a strong start to the back-to-school shopping season as well as robust online sales, and added that Target’s same-store sales estimate of a gain of 1 to 2 percent “suggest that guidance may prove conservative.”

“That said, [the fourth quarter] will be the true test for the new management team as comp trends have historically decelerated on a two-year basis in [the fourth quarter] from [the third quarter],” the analysts said. “Target’s recent performance provides evidence that the company is benefiting from changes in merchandising, marketing and store presentation.”

As a result, Telsey analysts maintained its “outperform” rating on the stock, and raised its 12-month price target to $91 from a prior target of $87.

Craig Johnson, president of Customer Growth Partners, just released a “True Operating Productivity” (TOP) analysis comparing Target with Wal-Mart Stores (the company’s U.S. stores only). The metrics include operating income and retail square footage as a percent of sales.

Johnson said in the report that Walmart “continues to maintain a large sales productivity advantage over Target, with [sales per square foot] almost 48 percent greater than Target, reflecting sharply higher traffic counts at Walmart.”

Johnson also noted Walmart “maintains a large TOP Ratio edge over Target, although the performance gap is not nearly as large – about 25 percent in [the second quarter] – reflecting the high economic efficiency of Walmart’s superstore fleet.” He noted that from a sales productivity perspective, both retailers showed gains, but Target’s growth was more than double that of Walmart.

Another noteworthy trend is that for the past two quarters, Target and Walmart’s TOP ratios have been diverging with Target seeing “robust” growth in operating productivity as Walmart declines.

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