New Targets for Target

I would like to think that even those who loathe Wal-Mart (NYSE: WMT  ) would at least have the maturity and intellectual honesty to acknowledge that it's one of the best-run retailers out there.

Yet here we have Target (NYSE: TGT  ) continuing to grow despite going head-to-head with Wal-Mart every day in virtually every market. What's even more interesting to this Fool is that you can make a case for Target having plenty of room for improvement in the years to come.

Now, it's not like current results aren't good. Revenue was up more than 11% in the fourth quarter as the company saw same-store sales rise 4.2% (on top of a 5.4% rise last year). Gross margins improved very slightly, and earnings from continuing operations rose 14%. Further, cash flow improved whether or not you opt to make any adjustments in cap-ex to separate "growth cap-ex" from "maintenance cap-ex."

So how do I think Target can do better? Three ways, mostly.

First, I think the company could improve its margins by doing more direct sourcing (i.e., bypassing wholesalers and distributors) for its stores. Second, I think the company can continue to roll out more private-label merchandise. Target generally attracts a more affluent customer base than Wal-Mart, and Target could reap better margins from that with the right sort of private-label products. Last and not least, I think the company could do more with the Internet as a sales channel.

In the meantime, Target still has plenty of potential just in stealing away more grocery business from the likes of Kroger (NYSE: KR  ) or Safeway (NYSE: SWY  ) and more apparel and housewares dollars from the likes of Sears (Nasdaq: SHLD  ) and J.C. Penney (NYSE: JCP  ) .

Couple that potential with today's price, and you'd seem to have a stock that still has some upside to it.

Click on for more retailing Takes:

• One Not-So-Super Market
• Staying on Target

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).