Target (NYSE:TGT) launched its newest designer collaboration last Sunday and by day's end, most of the Phillip Lim collection was out of stock online.
Lim's line seems likely to join Missoni's 2011 debut in the category of rousing success. On the other side of the divide stands the Neiman Marcus collaboration from holiday 2012. The Neiman offerings included clothing and household items with prices up to $500. That proved too much for the average holiday shopper and Target was left admitting that the endeavor "didn't work."
Will this holiday season prove more successful for this dividend player?
The tidings weren't good
The holiday season last year didn't leave Target feeling merry and bright. Fourth-quarter comparable-store sales rose 0.4% compared to a 1% increase at Wal-Mart Stores (NYSE:WMT). Sears Holdings' (NASDAQ:SHLD) domestic eponymous stores showed a 0.8% increase, though Kmart lagged behind with a 3.7% drop.
It's not that Target did anything particularly wrong; the Neiman line wasn't driving customers away from the store. The holiday season happened to have fierce pricing competition as retailers tried to woo consumers who were still nervous about spending too much money.
That competition showed early through the layaway and pricing plans. Wal-Mart announced its free layaway program with no down payment in August last year. The store included popular gift segments such as toys and electronics. Sears also dropped its layaway fees and included any item in the store. Customers could also layaway items sold online and have the paid-off gift shipped to the house.
Target's big push came through a price-match guarantee that included online retailers. That was a play to keep customers away from Amazon.com (NASDAQ:AMZN). Target decided to continue this policy after the holidays, which could lead to shrinking margins.
But Target's pricing and products will have company in this year's holiday story.
Target will open more than 100 stores in Canada before year's end. The company opened its first store in our northern neighbor this past spring. And this marks the first time Target's ventured outside of the United States.
The expansion will keep costs high in the short term, but it's worth the long-term potential. Canada opens up even more opportunities for limited-edition lines. Outdoor-clothing company Roots is already planning an exclusive line at the retailer.
Dividend wrapped in a bow
Target is currently trading at about 16 times earnings, compared to Wal-Mart's 15x. But that's still a better deal than Sears' losses and Amazon's forward P/E of 106.
The store falls behind the performance numbers of its competitors. Target is up less than 1% over the past year and up about 9% year to date. Wal-Mart is up 3% for the year and 11% year to date. Sears is up 46% year to date and Amazon is up 19%.
Target does pack a nice dividend. The store's yield is 2.7% -- higher than Wal-Mart's 2.5%. But Wal-Mart wins at payout ratio, or the percentage of net income paid out in dividends. Wal-Mart's at 43% for the trailing 12 months while Target's at 35%. That's unsurprising considering that Target's still largely in growth mode as it pursues the Canadian expansion. The company has also increased payouts for the past four years while Wal-Mart's numbers wavered.
Amazon doesn't pay dividends because the money goes back into the company to fuel growth. In Amazon's case, the reinvestment resembles refueling the engine of a sports car mid-race.
Foolish final thoughts
Target might fall short of Wal-Mart again this holiday season. But long-term investors can still look forward to the results of the Canadian expansion. And that dividend would look nice wrapped in a bow under the tree.
Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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