Is Target Stock A Buy?

Is Target Stock A Buy? Triple digit sales growth, smart use of its stores, surging sales and earnings, and a steady and growing dividend means Target stock will keep hitting the mark despite steep competition.

Target Corporation [NYSE: TGT] is an American retail corporation, which owns and operates large-scale food and general-merchandise discount stores.

One of the largest discount retailers in the United States, the company operates around 1900 stores across the US and the District of Columbia.

Target sells products through its stores and digital channels, including, at discounted prices.

It offers curated general merchandise and food assortments, including perishables and frozen foods, baked goods, meat, dry grocery, and dairy; apparels, home décor products, toys, electronics, beauty products, household items, seasonal offerings, and other merchandise.

Target Corporation was founded by George Draper Dayton in 1962 and is headquartered in Minneapolis, Minnesota.

Is Target Stock A Buy?

Target was one of the biggest retail success stories of 2020. Target’s efforts to improve customer shopping to “adapt to rapidly evolving guest preferences” have reaped rich dividends for the company

Analysts were quick to point that the retailer’s “guest preference” initiative, in fact, was just a euphemism for making hefty investments in its e-commerce operations to challenge e-commerce giant [AMZN] in the digital retail sales and delivery space.

The stellar show by the company’s online offerings during the pandemic ushered in a new era of success, with the company boasting of numbers that put it on par with giants like Walmart [WMT] and Amazon.

The Minneapolis-based big-box retailer emerged as one of the big winners of the pandemic, as its efforts to renew its own brands, remodel its stores and strengthen its e-commerce platform paid off in a spectacular fashion. Its improved grocery offerings and newfound online prowess ushered in new heights for the discount retailer.

Target took the market share away from weakened department stores by introducing its own line of upscale stylish products at affordable prices. 

For example, its apparel brands (many of which are quite new), created in collaboration with well-known fashion designers such as Isaac Mizrahi and Jason Wu, managed to strike a chord with its customers, enabling the company to steal a march over its competitors.

Target Reported A Blistering Quarterly Result

When the going gets tough, the tough get going. Target is a perfect example of this, as the discount retailer countered the mayhem caused by the pandemic by investing in its merchandise and e-commerce strategies, allowing it to report a blistering Q3 earnings report.

Target’s exclusive product launches, including its newer home furnishings, rising popularity of its Good & Gather food brand, and stellar performance of its Cat & Jack kids’ clothing line, along with a host of other innovative approaches helped the discount chain trounce expectations with EPS of $2.79 (105% higher than last year) on $22.63 billion revenue.

The consensus estimate was EPS of $1.60 on revenue of $20.91 billion. Comparable sales at Target leapt 20.7% (nearly double of 11.6% expectations) in the quarter ended Oct. 31, while comparable digital sales rocketed a mind-boggling 155%.

Same-store sales gauge the performance of retail operations. It is a keenly watched measurement of performance as it allows retailers to compare this year’s sales in their store to the same period last year.

Target’s net earnings rose in the quarter to $1.01 billion, from $714 million a year earlier. The retailer’s astonishing growth in e-commerce left even its CEO pleasantly surprised.  “The result is unprecedented market share gains and historically strong sales growth, both in our stores and digital channels,” said Brian Cornell, CEO on the earnings call.

Target E-Commerce Has Mushroomed Top Line Sales

Target has boosted its e-commerce capabilities, thanks to its investments in fast, convenient, reliable and contactless services such as Buy Online Pickup in Store (BOPIS), Drive Up (curbside pickup), and Shipt delivery service, which, together, grew more than 200% in the quarter, thanks to their popularity with shoppers during the pandemic.

Target spent $550 million to acquire Shipt same-day delivery services in 2017, and it has played a major role in its runaway success.

The mega-retailer ships more than 65,000 products through Shipt, including groceries, baby products, apparel and beauty products, to name a few.

Customers need to choose  press the “Deliver same day” button, and the product is delivered the same day if the service is available in the customer’s zip code.

A major achievement for Target, apart from its dazzling e-commerce performance, was its ability to draw customers into its store, a remarkable feat at a time when the raging pandemic was forcing people to stay indoors.

Impulse Purchases Driving Sales Growth

Customer traffic increased 4.5%, as the company reaped rewards of its hefty $7 billion program in the past three years to remodel and beautify its stores, pay more attention to categories like beauty products that are known traffic drivers, and lay special emphasis on its smaller but important food offering.

Analysts believe that being able to draw in people for fun, and then let impulse purchases take over, is one of the hallmarks of retail success. Target seems to have incorporated this practice well, as the discount retailer has not let money come in the way of enhancing the visual presentation of its products, making shopping fun, enjoyable and alluring – all the more crucial at the time of pandemic.

Target also benefitted a lot from its rather fortuitous investment in home improvement and home décor products just before the pandemic struck. With people stuck indoors and plenty of free time at their disposal, they went on a splurging spree to beautify their homes.

In fact, a spending boom on home improvement boosted stock value of other retailers like Home Depot (HD) and Lowe’s as well. 

Target Growing Across The Board

Other categories where Target is preying upon its rivals include, electronics, growth above 50%; clothing sales, up 10% (inflicting misery on rivals like Kohl’s, whose third-quarter sales witnessed more than a 14% decline); and beauty products.

Target recently entered into a collaboration with Ulta Beauty to create “an exciting new beauty experience.” Ulta Beauty, Inc., is an American chain of beauty stores, which offers customers prestige & mass cosmetics; men’s and women’s fragrances; nail, makeup, bath and body products; haircare and beauty tools, & salon.

And the icing on the cake for investors is the retailer’s reliability when it comes to dividend payments.

The company recently declared a quarterly dividend of 68 cents per common share, marking the company’s 214th consecutive dividend paid since October 1967 when the company became publicly held.

TGT paid $340 million in dividends for the third quarter, compared to the $337 million it paid during the same time last year, an upswing of 3%.

Will Target’s Red Hot Streak End?

Target was highly successful in riding the digital boom sped up by Covid-19 this year, courtesy its investment in infrastructure for same-day services, curbside pickup and better shopping apps to fulfill its digital orders.

There’s the Shipt delivery service through which items are delivered to customers as quickly as in one hour same-day services like Order Pickup, where customers order products online and pick it up from physical stores; and the Drive-Up service, where customers order products through theTarget app, and the Target staff bring the items to the customer’s vehicle.

However, it will be a challenging task for the retailer to continue its red-hot streak of sales gain in the digital vertical given the increasingly competitive pressures from other larger internet retailers like Amazon, which means the cost to compete will continue to move upwards, thwarting profit growth.

Also, it is to be noted that company’s online sales are less profitable than physical store sales due to the cost associated with delivering goods to the customers’ location of choice. This could duress the profit margin for the company.

However, Target contends that customers are increasingly opting for same-day services instead of shipping which, in turn, will bring down its digital fulfillment costs, and improve its profit margins.

Also, with positive news on the vaccine front, there is hope that the pandemic will be eventually reined in, and investors will once again start focusing on value stocks (stocks that trade for relatively cheap valuations).

Will Value Stocks Like Target Get Popular Again?

Growth stocks ruled the roost in 2020, a theme that has played out throughout most of the past decade. However, with the economy opening, investors’ focus is likely to shift towards beaten-down stocks trading at low valuation.

Management, no doubt, has done an exceptional job of adjusting to the digital economy, a fact attested by its blowout digital sales. Target has tremendously benefitted, both from the pandemic as well as its foresightedness, having made sound investments over the past few years, with its stock value up more than 38% since the beginning of the year.

However, value stocks have been in a comeback mode since the beginning of November, hinting that 2021 may be the year of the value investment. It may not be that great a news for growth stocks like Target as there are signs on the horizon for a potential resurgence of value stocks.

Also, the company, despite reporting a five-year earnings growth rate of 8%, suffered earnings declines in 2015 and 2018. Additionally, sales growth, too, has suffered minor hiccups along the way, dipping in 2014 and 2017.

To sum it up, future growth for Target, to a considerable extent, will be determined by its ability to quickly adopt to rapidly changing market conditions.

The discount retailer needs to continuously come up with smart, creative strategies to retain, and expand its market share.

Are Target Competitors Stealing Market Share?

The general merchandise retailer can count Best Buy [BBY], Costco Wholesale [COST], Macy’s [M], Kohl’s [KSS], Walmart [WMT], and as well as digital sales giant Amazon as its direct competitors.

The pandemic gave an incredibly hard time to both businesses and customers.  But Target was a standout performer, having made life a little easier for customers by sprucing up its delivery service.

The discount retailer’s efforts to improve customer shopping allowed it to deliver better results than its competitors like Walmart and Costco, which also sell essentials.

Target typically appeals to customers with higher income, who desire high-quality merchandise and low-cost designer fashion.

On the other hand, Walmart competes on price, thus primarily appealing to lower-income households. Costco customers are more affluent, and thus, primarily isolated from an economic downturn.

Target vies for high-income Costco customers while also trying to keep its price low in order to draw lower-income shoppers.

Target Vs Walmart: Who Has The Edge?

Both chains, with their massive product assortments, and emphasis on fast and convenient delivery, have immensely benefitted from the pandemic, snatching the market share from pandemic-wrecked weaker rivals. However, Target has been a better performer, with its total revenue showing steady growth.

Year-over-year revenue growth for the discount retailer was over 11 % in the first quarter, close to 25% in the second quarter and over 21% in the third.

In comparison, Walmart’s year-over-year growth in the first quarter was 8.6%, 5.6% in the second quarter and 5.2% in the latest quarter.

Walmart e-commerce sales jumped 78% and overall comparable sales rose 6.4%, much less than digital sales growth of 155%, and same-store sales growth of 20.7% delivered by Target.

The early acquisition of Shipt allowed TGT to march ahead of its competitors in the growing delivery market, as it enabled the company to deliver products and groceries to consumers within hours of ordering them online. Home delivery was already growing quickly, before the pandemic caused it to grow at an astronomical pace.

However, rivals like Walmart have already started snapping at its heels with their own hefty investment in bolstering delivery infrastructure and technology. Walmart joined forces with DoorDash to deliver grocery to its customers at the same price as its stores. Customers can also make purchases online from the Costco website, and the order is fulfilled by Instacart.

More interestingly, the digital giant Amazon, aware of the fact that it risks losing market share if it allows other companies to best it on the delivery of anything, expanded Whole Foods and launched the Amazon Fresh grocery delivery service.

Target vs Costco: Battle Of The Titans

Brick -and-mortar retail was already struggling before the pandemic. Covid-19, for many retailers, proved to be the final nail in their coffin. However, amidst pandemic-induced wreckage, two big retailers, Target and Costco, stood firm, shining like a bright light in a dim world.

Both mammoth operators of department stores defied gravity, expectations, and estimates to post double-digit sales growth, and, more impressively, double-digit positive comparable sales in 2020. And the momentum is likely to continue in 2021 as well. 

This fiscal year has been a feast for Target, with the retailer firing on all cylinders. Comparable sales jumped 21%, digital sales leapt 155%, and adjusted earnings more than doubled.

The company’s next-gen growth initiatives have been a roaring success, but the record-shattering performance is not solely because of e-commerce growth. A large number of TGT’s shoppers are ordering online and picking it up from stores, despite the convenience of online shopping.

Costco, too, has started to pick up pace, with the retailer on track to post double-digit comps for the fiscal year that ends in August, snapping seven years of single-digit top-line growth.

Also, some analysts argue that the warehouse club operator is the undisputed leader in its niche, with its unique warehouse club model proving to be fruitful for both the company’s investors and customers. Both Target and Costco are highly successful companies with bright future prospects. 

However, Target enjoys a slight edge in comparison to Costco as it has been growing at a better pace than Costco in recent quarters, and the company is also a good dividend payer, with an attractive valuation.

Also, not to forget is the fact that online sales giant Amazon is still the thousand-pound gorilla in the room, but Target has proven beyond contention that it is here to stay and compete with all the Big Boys in the fiercely competitive digital space.

Is Target Stock A Buy: The Bottom Line

Target has emerged as a big winner during the pandemic. While other retailers were shuttering stores, Target was busy expanding its revenue and earnings. The discount retailer, because of its savvy digital strategy, has been a huge beneficiary of the global health crisis.

At the peak of the contagion, when people were forced indoors, Target already had in place an infrastructure to let shoppers conveniently shop from its online platform. 

Data from IBM’s U.S. Retail Index show that the pandemic has accelerated the shift from physical stores to buying things online by five years.

The same is reflected in its tripling digital sales year over year. Most recently, the discount retailer reported a 102% increase in digital comps over the November/December holiday period.

Also, it is very important to note that, despite triple-digit growth rates in digital sales, Target’s stores remain as relevant as ever. In the third quarter, the company reported that it fulfilled a whopping 95% of its online orders through its stores, rather than from its warehouses, leading to significant cost savings.

To put it in perspective, when a customer orders an item online and then picks it up from Target stores, the transaction is 90% cheaper for Target. Additionally, Target is a top dividend payer, having increased its dividends for 25 consecutive years.

The retailer currently pays an annual dividend of $2.72 per share, with a 1.42% yield. And with its coffers overflowing, investors can sleep peacefully, aware of the fact that the company has enough money to continue with its generous dividend payouts.

Bear investors, on the other hand, may argue that the solid growth for the company came riding on the pandemic, and many of the tailwinds to the business in 2020 will not be present as the pandemic is brought under control and consumers return to more normal shopping habits.

However, Target was moving in the right direction even before the pandemic, with its online sales already on the rise. Even as vaccines become more widely available, and life returns to normal, it is expected to keep its positive momentum, thanks to the market-share gains. 

Target is not only gaining new customers but also retaining them, which will keep this steady all-weather performer in a strong position for years into the future.  

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.