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Why Target Stock Will Reward Investors in 2013

By Tamara Walsh - Apr 17, 2013 at 1:44PM

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Will Target stock climb higher in the quarters ahead?

Shares of Target (TGT 1.26%) slid lower on Tuesday, despite the broader market climbing higher. Investors punished Target stock after the discount retailer cut its first-quarter profit outlook. The company now says its first-quarter earnings will come in below $1.10, which was the low end of its prior estimate of $1.10 to $1.20 per share. Not surprisingly, Target blamed the unusually cold weather for its weak sales. Nevertheless, Target stock is up more than 16% year to date and currently trades at around $68 a share, despite these seasonal setbacks.

A brave new retail world
With many investors left wondering if Target stock has more room to run, let's look at Target's past and where the company is headed in the year to come. In 2012, Target was able to successfully adapt to changes in the retail environment even as other big-box stores, such as Best Buy (BBY -1.31%), suffered.

Amazon.com (AMZN 0.25%) and other e-commerce sites have dramatically shifted the retail landscape over the past few years. Unfortunately, the world's largest electronics retailer was slow to change with it. For more than a year, Best Buy refused to acknowledge that it was being hurt by "showrooming," and instead insisted that its stores offered value where Amazon could not by providing home installations. We all know how that has worked out for Best Buy.

Target, on the other hand, has been able to fend off comparison-shopping by offering customers exclusive merchandise, and a boutique experience with The Shops at Target. These initiatives have helped the retailer attract more customers to its stores. The success of these programs has also helped the stock gain as much as 23% in the past year. However, it is Target's push into Canada that will likely lift shares higher from here.

Growth in new territories
One thing that's certain to drive earnings growth for Target in the years to come is the rollout of its Canadian stores. Target opened its initial stores in Canada last month, marking the company's first push outside of the United States. Importantly, the discount retailer expects to open 124 Canadian stores in time for the all-important December shopping season.

Of course, Target's profit margins will likely suffer in the near-term because of costs tied to new store openings. However, investors should look at Target stock as a long-term play. It's important to note that while Target lowered its first-quarter forecast, the company maintained its full-year outlook. For this reason and the others outlined above, I think Target is still a buy today. Better still, I'm confident that this retail stock will outperform the market in 2013.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$155.36 (1.26%) $1.93
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,151.82 (0.25%) $5.44
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$72.36 (-1.31%) $0.96

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