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New Targets for Target

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 6:57PM

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If Target can start reaping back-office efficiencies, better margins could be on the way.

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.

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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).

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Stocks Mentioned

Walmart Stock Quote
Walmart
WMT
$130.06 (-2.50%) $-3.33
Target Corporation Stock Quote
Target Corporation
TGT
$152.61 (-0.23%) $0.35
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ
The Kroger Co. Stock Quote
The Kroger Co.
KR
$44.86 (-1.41%) $0.64
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q

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