Target Hits the Mark

Nobody can beat Wal-Mart (NYSE:WMT). Competing against Wal-Mart is suicide. Wal-Mart is crushing the retail market.

Blah, blah, blah. Wake me up when the doomsayers are done.

If Wal-Mart is unbeatable, somebody forgot to tell Target (NYSE:TGT). Revenue for the nation's second-largest discounter grew 11% for the fourth quarter, and same-store sales were up 5.4%. As has been the case lately, Target drove income growth at a faster rate than revenue. Net income for the quarter grew 12%, and operating margins held more or less steady.

Cash flow generation was not quite as impressive, though. Free cash flow for the year totaled just $88 million and would have been negative had there not been a $1.3 billion benefit to operating cash flow from the gain on sale of the Marshall Fields and Mervyn's businesses.

To management's credit, though, it did not squander the money from those asset sales. While some management teams may have been tempted to use the money to "buy growth" by making acquisitions, Target used the money to pay down debt and purchase shares.

For the year, Target bought $1.29 billion worth of shares in the market (out of total authorization of $3 billion). To put that sort of return of capital into perspective, Target could have purchased the entire business of Hot Topic (NASDAQ:HOTT) or Linens 'n Things (NYSE:LIN) lock, stock, and barrel. Instead, it returned the money to shareholders.

Target isn't through growing, either. The company expanded its store base by almost 7% for the year, and management expects to add more stores. Target's online business is posting double-digit growth as well and ranks fourth among retailers in Nielsen ratings.

While it is true that rival Wal-Mart posts a stronger return on equity, Target is growing faster and has a slightly better margin. Of course, Wal-Mart is more than five times the size of Target in terms of market capitalization, so all comparisons are a bit limited by the difference in scale.

Target has nonetheless proven that competing against Wal-Mart is not commercial suicide. Rather, by targeting a slightly more up-market clientele, Target has managed to post solid growth and returns. Although the company's EV-to-FCF ratio is off the charts, this is due in part to the company's ongoing aggressive expansion. On a conventional P/E basis, the company's multiple of 24 times trailing earnings seems very reasonable for a solid company that thinks it can continue to grow earnings at a 20% clip.

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.