Having grown accustomed to the Wal-Mart (NYSE: WMT) near my hometown, I was amazed at the brightness, quality, price and choices available at a competing new-to-me retailer during my visit while on vacation.#-ad_banner-#

A closer look at the merchandise revealed high-end designer fashions such as Missoni, Oscar de la Renta, Tory Burch and Marc Jacobs, along with a host of other top names. This was a far cry from my experience at other mass-market retailers.

Prior to learning about this retailer, I was convinced that one needed to travel to speciality boutiques in the city or mall to purchase designer goods. Soon thereafter, I moved to a region with this retailer as a local fixture. Needless to say, it became a must-stop location on nearly every shopping excursion. As a patron of this company, I am always intrigued with its ability to offer an impressive mix of the latest fashions and everyday products in an attractive display while maintaining an accessible price point. 

Following the advice of former Fidelity fund manager Peter Lynch (“Invest in what you know”), I decided to dig deeper into this company as an investment. Needless to say, I was impressed with what I discovered. 

If you haven’t guessed, I am talking about Target (NYSE: TGT).

Launched in 1962 as the brainchild of the Minneapolis-based Dayton department store chain, Target has grown into a behemoth, with more than 360,000 employees and 1,778 stores in 49 states. The company boasts a market cap of over $44 billion, revenue of more than $73 billion and gross profit of nearly $23 billion.

With a yield of about 2.5%, the company has paid 184 consecutive quarterly dividends since its IPO in 1967, including $779 million returned to shareholders in this year‘s first quarter. Target’s balance sheet shows a respectable cash position of more than $1.8 billion and a current ratio of 1.06.

However, Target’s performance slipped in its most recent quarter. The company experienced a sharp 26% year-over-year decline in earnings per share, same-store sales dipped 0.6%, and domestic revenue eased higher just 0.5% during the same period. 

The most troubling news of all is that the company issued downward guidance for 2013, lowering the projected adjusted earnings per share from a range of $4.85 to $5.05 a share to between $4.70 and $4.90. Despite this lackluster performance and diminished guidance, Target’s share price has just slipped a little from its 52-week highs and remains nearly 22% higher on the year.

Is the current pullback providing a solid buying opportunity, or is it signaling that the top is in place in this leading retailer? 

Although the stock may pull back further from the highs, an excellent time to purchase shares is setting up. Here’s why:

1. U.S. Retail Sales Were Better Than Expected In May

U.S. retail sales have increased in four of the past five months, including a 4.9% year-over-year gain in May. While these numbers are nothing to get excited about, they do indicate that U.S. consumers — the lifeblood of retailers — remain active.

2. Canadian Expansion

Having spent some time traveling in Canada, I can vouch for the fact that the Canadian consumer is starved for choice and designer value. I was shocked at how little choice of quality designer goods was available for our northern neighbors. Target entered the Canadian market with a rollout of 24 stores and has plans for 120 total stores by the end of 2013. Although the Canadian expansion and certain debt repayment is one of the prime reasons for the recent slow numbers, the relatively virgin retail territory of Canada should be a huge positive for Target’s bottom line in the long run.

3. Customer Loyalty

Target operates a very successful loyalty program, the Red Card, which is offered in the form of a debit or credit card. There are already more than 44,000 Red Card holders in Canada, which helped spur its successful launch. In addition, U.S. card ownership has been forecast to increase by 15% to 20% by year’s end. The Red Card provides customers an additional discount for shopping at Target. Combine the discount with the already consumer-friendly choices and prices, and it adds up to a powerful combination.

4. Online Initiative

Target recently acquired Chef’s Catalog and Cooking.com, as well as introducing Cartwheel with  Facebook (Nasdaq: FB). While Amazon.com (Nasdaq: AMZN) remains the elephant in the online retail space, these initiatives will help Target keep pace with competitors.  I particularly am impressed with the Cartwheel service, which allows consumers to earn a discount by purchasing certain items in combination with one another. In addition, Target is testing a same-day delivery program in limited markets in cooperation with Google (Nasdaq: GOOG) and eBay (Nasdaq: EBAY). These types of cutting-edge offerings will allow Target to remain a leader in the retail space.

Risks to Consider: Target appears to be on the right path for long-term profitability. However, all retail is tied to the performance of the economy. Therefore, the primary risk with Target is that the economy falls into another recession or worse. 

Action to Take –> I think Target provides a significant long-term buying opportunity. However, waiting for a technical breakout will place momentum on your side. There is solid technical support at the $68 level and resistance exists at $70 and $72. My plan for Target is to buy one half of my entry position on a break above the $70 resistance level. The other half will be deployed on a break of the $72 level. My 18-month target price for Target is $77.

P.S. — Stocks like Target are perfect for the “Dividend Trifecta” strategy. While it only yields 2.5% today, it has raised its dividend payment 500% in the past 10 years. And it has the cash to continue that performance. To learn more about the “Dividend Trifecta,” click here.