May 21, 2012

Target Corporation
Current Recommendation Prior Recommendation Date of Last Change Current Price (05/18/12) Target Price

(TGT-NYSE)
SUMMARY Target s strategic initiatives should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that increased focus on consumable items will boost sales in a soft consumer environment, as was evident from the company s first-quarter 2012 results. The quarterly earnings of $1.11 per share beat the Zacks Consensus Estimate of $1.01 and rose 11.5% from the prior-year quarter on the back of 5.9% rise in total sales. The better-than-expected sales results, prompted management to raise its fiscal 2012 earnings guidance to a range of $4.60 to $4.80 per share. The company s long term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017. Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities in international markets. However, stiff competition and sluggish economic recovery still remain matters of concerns.
Risk Level * Type of Stock Industry Zacks Industry Rank * Low, Large-Blend Retail-Discount 33 out of 267

NEUTRAL
Outperform 12/07/2009 $55.46 $58.00

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh) Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend Dividend Yield (%) 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2012 Estimate P/E using 2013 Estimate Zacks Rank *: Short Term 1 3 months outlook
* Definition / Disclosure on last page

$58.86 $46.33 13.78 0.90 4,922,135 668 $37,074 2.25 78 1 $1.20 2.16

ZACKS CONSENSUS ESTIMATES

Revenue Estimates
(In millions of $)

Q1 (Apr)

Q2 (Jul)
15,532 A 16,240 A 16,819 E

Q3 (Oct)
15,605 A 16,402 A 16,987 E

Q4 (Jan)
20,661 A 21,288 A 22,700 E

Year (Jan)
67,390 A 69,865 A 73,373 E 77,208 E

2010 2011 2012 2013

15,593 A 15,935 A 16,867 A 17,705 E

2.6 7.4 20.4 12.3 13.0 11.5

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1 (Apr)

Q2 (Jul)
$0.92 A $1.03 A $1.01 E

Q3 (Oct)
$0.68 A $0.87 A $0.76 E

Q4 (Jan)
$1.38 A $1.49 A $1.40 E

Year (Jan)
$3.86 A $4.41 A $4.28 E $4.84 E

2 - Buy

$1.08 E Earnings adjusted for expenses related to Canadian operations

2010 2011 2012 2013

$0.90 A $0.99 A $1.11 A

Projected EPS Growth - Next 5 Years %

11

2012 Zacks Investment Research, All Rights reserved.

www.Zacks.com

111 North Canal Street, Chicago IL 60606

OVERVIEW
Founded in 1902, and headquartered in Minneapolis, Minnesota, Target Corporation (TGT), operates through two reportable segments Retail and Credit Card. Retail Segment (98% of 2011 total revenue) includes large-format general merchandise and food discount stores in the United States and a fully integrated online business (Target.com). The company trades in both daily necessities and fashionable merchandise. Target offers an assortment of general merchandise, including consumables and commodities; electronics, entertainment, sporting goods, and toys; apparel and accessories; and home furnishings and decor, as well as a line of food products mainly under the Target and SuperTarget brands. The company also offers merchandise through programs, such as ClearRx, GO International, and Home Design Event. Target also offers merchandise under private-label brands, such as Archer Farms, Boots & Barkley, Embark, Garden Place, Gilligan & O'Malley, Market Pantry, Room Essentials, Target Brand, Target Home, Vroom, Wine Cube, Xhilaration, and others. It also sells merchandise under licensed brands comprising C9 by Champion, Chefmate, Cherokee, Eddie Bauer, Genuine Kids by Osh Kosh, Kitchen Essentials by Calphalon, Liz Lange for Target, Michael Graves Design, Nick & Nora, Perfect Pieces by Victoria Hagan, Sean Conway, Simply Shabby Chic, Smith & Hawken, Thomas O'Brien, Waverly and Woolrich. Target also manages in-store amenities, such as Food Avenue, Target Clinic, Target Pharmacy, and Target Photo, as well as leased or licensed departments, including Optical, Pizza Hut, Portrait Studio, and Starbucks. Credit Card Segment (2% of 2011 total revenue) offers credit to customers via branded proprietary credit cards, including Target Visa and Target Credit Card. With effect from April 29, 2010, the company had stopped issuing Target Visa Credit Card, and instead will issue Target Credit Card to all new applicants. The new card will be accepted at all Target stores and Target.com. The company also notified that existing Target Visa Credit Card holders will not be impacted. As of April 28, 2012, Target currently, operates 1,764 stores, of which 521 are general merchandise stores, 992 are expanded grocery assortment and 251 are SuperTarget stores.

REASONS TO BUY
Target s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment. The company s long term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017. Going forward the company will focus more on store renovations and improving store sales productivity. Target in 2012 plans to sustain its remodeling program at existing general merchandise locations, which include an expanded grocery offering, improved store layout and enhancement of instore shopping experience across departments, such as apparel, home, beauty, shoes, and baby. The company plans to complete about 230 more general merchandise remodels in the year.

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Target, similar to that of its biggest rival Wal-Mart Stores, plans to introduce a smaller store format of 60,000 to 100,000 square feet compared with the current format of 125,000 to 180,000 square feet, to tap the urban markets, where real estate remains a constraint. Target, will unveil its first three smaller format stores in Los Angeles, Seattle and Chicago in 2012. Another opportunity, which Target is eyeing, is the opening of stores in the international markets, such as Canada and Latin America. The company plans to open 125 to 135 stores in Canada by 2013 and 2014. We believe, the openings of stores outside the United States will definitely boost the company s top and bottom lines and improve cash flow generation capability. The company has been actively managing its cash flows thereby returning much of its free cash to shareholders via share repurchase program or dividend. During the first quarter of 2012, Target bought back about 10.5 million shares at a price of $57.31 per share, aggregating $604 million, and also paid dividends of $201 million. The company expects to repurchase shares worth of approximately $1.5 billion or more during 2012, which will lower the share count by 4%. The company has been consistently raising its dividend for the last 40 years, and expects it to increase to $3.00 per share or more by 2017 from the current $1.20.

REASONS TO SELL
Target in the retail segment faces stiff competition from discount stores, department stores, drug stores, specialty stores, supermarkets, wholesale clubs, and other forms of retail commerce on attributes such as location, price and quality of merchandise, in-stock consistency, merchandise assortments, and customer service. This may weigh upon the company s results. The global credit markets have recently undergone significant disruption creating difficulties for companies to obtain financing on reasonable terms, which could increase the cost of borrowings and diminish the ability to obtain additional financing or refinance existing long-term obligations. This may jeopardize the company s future growth plans. The greater concentration of the company s revenue generating capabilities in limited regions of the United States, poses a competitive threat to Target, compared with Wal-Mart and Costco, who are geographically diversified and are more resourceful. Moreover, Target s success rides on the stability of these particular regions. The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company s growth and profitability.

RECENT NEWS
Target Beats on Bottom Line May 16, 2012

Amidst, sluggish economic environment, cautious consumer spending and intense competition, Target Corporation posted better-than-expected first-quarter 2012 results on the backs of healthy sales. The quarter benefited from early Easter and favorable weather conditions.

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The company delivered quarterly earnings of $1.11 per share that topped the Zacks Consensus Estimate of $1.01 and rose 11.5% from $0.99 earned in the prior-year quarter. The quarterly earnings fared better than the company s previous projection of $0.97 to $1.07 per share. The healthy results, prompted management to raise its fiscal 2012 earnings expectation. On a reported basis, including costs related to Canadian operation and other special item, earnings came in at $1.04 per share, up 5% from the year-ago quarter. Let s Unveil the Picture Total revenue climbed 5.9% to $16,867 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $16,871 million. Retail sales grew 6.1% to $16,537 million as shoppers are gradually opening up their wallets but still remain wary. Target said that comparable-store sales for the quarter rose 5.3% compared with 2% increase registered in the prior-year quarter, and reflects the company s most robust comparable-stores sales performance in a quarter in over six years. The number of transactions rose 2%, whereas the average transaction amount climbed 3.2% in the quarter. Gross profit at the Retail segment jumped 5.4% to $4,996 million; however, gross margin shriveled 20 basis points to 30.2%, as the rate of increase in sales were not able to fully offset 6.5% rise in cost of sales. Segment operating income surged 12.9% to $1,199 million, whereas operating margin expanded 50 basis points to 7.3%. The company indicated that revenue from the Credit Card segment tumbled 7.1% to $330 million. Target also said that segment profit dropped to $141 million in the quarter from $213 million in the prior-year period. Target s credit card penetration increased 120 basis points to 7.1%, whereas debit card penetration expanded 280 basis points to 4.5% during the quarter. Total store REDcard penetration climbed to 11.6% from 7.6% in the year-ago quarter. Management indicated that Target s P-fresh remodel program, 5% REDcard Rewards program and The Shops at Target will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. The company also hinted of focusing on Expect More. Pay Less. brand promise. Further, Target, in order to tap the urban markets where real estate remains a constraint, plans to introduce smaller-format stores called City Target, and will open the first three stores in July. Moreover, in order to expand its global footprint, the company is eying Canadian market with an expected entry in 2013. Other Financial Details During the quarter, Target bought back about 10.5 million shares at a price of $57.31 per share, aggregating $604 million, and also paid dividends of $201 million. The company ended the quarter with cash and cash equivalents (including short-term investments of $18 million) of $675 million, total unsecured debt and other borrowings of $15,950 million and shareholders equity of $15,863 million.

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Stores Update Target currently, operates 1,764 stores, of which 521 are general merchandise stores, 992 are expanded grocery assortment and 251 are SuperTarget stores. During the quarter, the company opened 3 new stores. Strolling Through Guidance Target now projects adjusted second-quarter 2012 earnings between $1.04 and $1.14 per share. For fiscal 2012, earnings are expected to be in the range of $4.60 to $4.80 per share, up from $4.55 to $4.75 forecasted earlier. On a GAAP basis, including expenses related to the company s entry in the Canadian market, management projected earnings between $0.94 and $1.04 for the second quarter and between $4.10 and $4.30 per share for fiscal 2012. Management also projected a comparable-store sales growth of 3% or more in the U.S. retail segment for fiscal 2012. For the second quarter, Target anticipates comparable-store sales growth of approximately 3%. Target s Strategic Initiatives Management indicated that Target s P-fresh remodel program and 5% REDcard Rewards program will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. The company in order to entice customers is also providing an additional benefit of free shipping for any e-shopping, to its cardholders, who are already getting 5% off for the purchases they made. Target in order to expand its global footprint is eying Canadian market with an expected entry in 2013. Management said that it is looking for ways to drive traffic to Target stores, and in view to this it is expanding Pharmacy Rewards program beyond REDcard members. Target in 2012 plans to sustain its remodeling program at existing general merchandise locations by adding perishable food items, along with a deeper assortment of dry dairy and frozen items, and improved store layout and enhancement of in-store shopping experience across departments, such as apparel, home, beauty, shoes, and baby. During fiscal 2011, Target remodeled 400 locations bringing the total to 900 stores. In 2012, the company plans to complete about 230 more general merchandise remodels in the U.S. that will result in a total 1,100 remodeled stores by the end of the year. Another opportunity, which Target is eyeing, is the opening of stores in international markets, such as Canada and Latin America. The company plans to open 125 to 135 stores in Canada by 2013 and 2014 as a result of acquisition of leasehold interest in Zellers stores. We believe the opening of stores outside the United States will definitely boost the company s top and bottom lines and improve its cash flow generation capability. The transaction would help the company to exceed $100 billion in sales and would result in earnings per share growth at a CAGR of approximately 10% to 12% per year, resulting in annual earnings of over $8.00 per share or more by 2017. The company also expects to achieve 3% annual growth in comparable-store sales on an average. Target Corporation, in order to tap the urban markets where real estate remains a constraint, plans to introduce smaller-format stores called City Target similar to that of its biggest rival Wal-Mart Stores Inc. The company informed that the new stores will vary in size from 60,000 to 100,000 square feet compared to its typical format of 125,000 to 180,000 square feet. Target used to concentrate on the suitability of its
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large format stores for a particular location, which lowers its accessibility to the country s thickly populated urban regions and space-crunched cities. However, with the changing business scenario and rising competition, Target felt the need to have stores of various sizes and formats to align with the targeted area. We believe that the approach will help the company to augment its sales. Target, will unveil its first three smaller format stores in Los Angeles, Seattle and Chicago, with plans of opening similar format stores in cities, including San Francisco, Boston, Baltimore and Miami.

VALUATION
Target s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment. We believe that Target s Pfresh remodel program and 5% REDcard Rewards program will help drive sales. Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores. However, greater concentration of Target s revenue generating capability in a few regions of the United States, poses a competitive threat. Currently, we maintain our long-term Neutral recommendation on the stock. Target s current trailing 12-month earnings multiple is 12.3X, compared with 21.2X, the industry average and 13.5X for the S&P 500. Over the last five years, Target s shares have traded in a wide range of 9.9X to 19.2X trailing 12-month earnings. The stock is also trading at a discount to its industry average, based on forward earnings estimates. Our target price of $58.00, 13.6X 2012 EPS, reflects this view.

Key Indicators
P/E 5-Yr High (TTM) P/E 5-Yr Low (TTM)

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

Target Corporation (TGT) Industry Average S&P 500

13.0 18.7 12.8

11.5 15.9 11.9

11.4 14.4 10.7

7.2 13.2 11.8

12.3 21.2 13.5

19.2 104.1 27.7

9.9 11.0 12.0 15.1 13.4 8.5

Costco Wholesale Corporation (COST) 21.7 19.2 14.0 15.8 23.3 25.7 Sears Holdings Corporation (SHLD) 15.1 716.4 Wal-Mart de Mexico SAB De CV (WMMVY.PK) 23.3 19.5 16.4 19.4 25.9 54.9 TTM is trailing 12 months; F1 is 2012 and F2 is 2013, CF is operating cash flow
P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

EV/EBITDA (TTM)

Target Corporation (TGT) Industry Average S&P 500

2.5 4.5 8.6

3.5 4.5 8.6

1.6 4.5 2.9

19.3 20.7 32.4

0.9 0.3

2.1 0.6 0.0

6.6 7.9

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of TGT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1025 companies covered: Outperform - 14.0%, Neutral - 80.9%, Underperform 4.3%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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