Will Target’s New Strategy Drive Sales or Hurt Margins?

Just before Target (NYSE:TGT) reported that sales for the five-week period ended December 29 grew just 0.8 percent compared to last year, JPMorgan reiterated an “Overweight” rating on the stock with a slightly-revised price target of $74.00.

The bank forecasts strong 2013 and 2014 performance for the discount retailer, which has seen its stock price grow 26 percent over the past 52 weeks. Target’s entry into the Canadian market was cited as a catalyst for future earnings growth, although the company is expecting to take an earnings hit of up to $0.19 per share in the fourth quarter due to related expenses.

JPMorgan’s price target reflects a 20 percent potential upside to the stock, and the bank is sticking to its guns. Already one of the largest institutional shareholders of the stock, JPMorgan increased its stake in Target by over 29 percent…

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Trying not to disappoint the bank’s prediction for accelerated sales growth, Target announced that it would immediately begin a program to match the sales price on certain items (particularly popular electronics) with its top online competitors. This includes Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT), and Best Buy (NYSE:BBY).

“Guests can confidently shop at Target every day for the best value in retail,” commented Gregg Steinhafel, Target’s chairman, president, and CEO in a statement. “We know that our guests often compare prices online. With our new Price Match Policy and the additional five percent savings guests receive when they use their REDcard, Target provides an unbeatable value.”

That unbeatable value comes with a risk, though. Target is teeing up against retailers with slimmer operating margins (all eyes on Amazon). The price-matching scheme could bring down the profit margin on popular items and, as a result, cut into earnings.

Target Corporation Common Stock Stock Chart - TGT Interactive Chart - Yahoo! Finance

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