Should You Buy Target Stock?

In 2017, TARGET announced it would invest $7 billion over three years to “adapt to rapidly evolving guest preferences.”

Target positioned this investment to improve customer shopping. We’re in 2020 now, three years later, and “the investment has been proven to create an incredible upside,” says Scott San Emeterio, CEO of BallStreet Trading in New York City.

The retail giant’s 2017 initiative was essentially a euphemism for investing in its e-commerce operations to combat Amazon.com in the digital retail sales and delivery space.

Target’s digital offerings during the global health crisis puts it on par with Walmart and Amazon, San Emeterio says, and the company has the numbers to show for it.

Target released its second-quarter results in August and reported overall sales growth of 24.3%, compared with last year.

“(It’s) the strongest the company has ever reported,” according to the company’s earnings report, with digital sales increasing by nearly 200%.

That said, the Minneapolis-based big-box retailer still faces an extremely tough, slug-it-out operating environment, competing directly against the likes of Macy’s, Kohl’s, Walmart and Best Buy, as well as digital sales giant Amazon. While its recent earnings report illustrated just how well Target’s investments in e-commerce are faring, the company is still feeling the effects of the global pandemic on its bottom line.

How have Target’s efforts panned out, and where is the company headed from here? What can investors expect from retail’s sleeping giant? Let’s take a look:

TGT Stock at a Glance

In 2017, Target announced that it would invest $7 billion in its operations by 2020 and that it would double the amount of its small-format stores and drive its grocery prices lower to better compete with Kroger (KR) and Walmart.

As part of that initiative, Target has poured billions into its digital retail platform, including faster (and free) delivery options. In the first quarter of 2020, the company spent an additional $500 million on pandemic-related expenses, such as wage and benefit increases for employees to continue working during the health crisis.

Over the last few years, Target has invested heavily in sprucing up its delivery service to better compete with Amazon, but with a twist: Instead of relying on an Amazon-like network of high-functioning fulfillment centers, TGT would deliver goods straight from its stores – or, as John Mulligan, executive vice president and chief operating officer at Target called them, “mini-fulfillment centers.”

Target has earned its place among its competitors based on its second-quarter financial gains.

“There is little room for debate that Target is a brand that has been able to define success during (the pandemic) and the new normal by tripling digital sales year over year,” San Emeterio explains. “Amazon is still the thousand-pound gorilla in the room, but Target just proved they are here to stay and will contend in a very competitive digital space.”

Amid the pandemic, Target’s delivery service Shipt has become critical to the company’s success as customers choose to stay home rather than risk going out. The company has doubled down on in-store pickups and instituted its newer Target Drive Up contact-free pickup program to encourage shoppers to keep making purchases at the store location, measures that helped boost sales in the first quarter.

Pros of Buying Target Stock

Cindy Frick, who was a senior consumer equity research analyst at USAA, previously painted 2017 as an investment year for Target and summed up what management was hoping to achieve over the long run.

“TGT increased investments in price, labor, new exclusive private label brands, digital capabilities and supply chain management,” Frick said in May 2020 after Target’s first-quarter earnings.

As it turns out, forward-thinking investments would lead to 2019 being a year of acceleration and transition proved prescient, and 2020 has continued that trend. In August 2017, TGT stock was trading at around $88. Even with the slump in its stock price in early 2020 that every retailer experienced as the virus picked up its pace, shares of Target are up 75% in the last three years, sitting around $154 as of this writing.

This appears to be a well-deserved increase in valuation: In the last few years, Target has seen consistent increases in its comparable-store sales – the holy grail of all brick-and-mortar retail metrics. Of course, those increases have diminished in light of the virus but have been bolstered by the digital services and same-day fulfillment investments that Target made; between digital sales and in-store sales, overall comparable-store sales increased 10.8% this past quarter.

Target saw an 84.4% year-over-year increase in earnings per share (EPS) to $3.35 and an adjusted EPS of $3.38, an 85.7% increase from last year, which indicates strong operating performance despite the big-box retailer’s additional pandemic-related expenses.

Target paid shareholders dividends totaling $330 million in the second quarter, a 3.1% increase from the prior year.

Its same-day pickup sales increased 273% this quarter, which accounted for six percentage points of the company’s overall comparable sales growth. While that increase is clearly thanks to the pandemic, if even a portion of those customers continue to use Target’s services going forward, it will add a nice bump to the company’s revenue.

In the second quarter of 2020, Target’s revenue of $23 billion increased by 24.7% compared with last year – an impressively high number given the current retail environment.

Cons of Buying Target Stock

Despite the boost from digital sales, largely thanks to consumers stocking up on grocery items, analysts point to some concerns. There is stiff competition among retailers, and the battle to gain market share in this space proves that large-box retailers must have a framework in place to succeed in the digital vertical.

Consumer discretionary analyst Brian Yarbrough from Edward Jones in Kansas City, Missouri, points to potential challenges as the company faces “increasingly competitive pressures” from other larger internet retailers.

“We have concerns about the competitive pressure from online retailers and lowering pricing from Walmart as well as the lack of any strategy to drive improved results within the grocery business,” Yarbrough says.

As previously noted, TGT is investing billions to improve its online presence, but this may put a drag on profits. In addition, though digital sales skyrocketed this quarter, the cost for fulfillment of those sales is high.

Although Target mitigates some of this pain by using its stores as miniature fulfillment centers, increased digital and same-day sales still sent costs higher. “While e-commerce business will help drive sales we believe it will negatively weigh on profits due to the costs of shipping,” he notes.

Even though the second-quarter gross margin rate was 30.9% in 2020 compared with 30.6% in 2019, it’s still important to be aware of the risks that have the potential to curb profit growth.

The Bottom Line for TGT Stock

It’s tough to discount how well Target has executed on the plans it made way back in 2017.

They were equal parts bold, necessary and risky at the time. In a Wall Street environment that prizes short-term thinking, it took guts to sacrifice near-term profitability for a grander competitive vision.

Today, one-day fulfillment is working out well, digital sales are thriving and same-store sales have consistently risen over time. Though there are legitimate concerns about the costs of Target’s digital strategy, investors who believe that investing in quality companies pays off over time should be reassured by Target’s recent results.

As things stand now, the pros seem to outweigh the cons. Retail’s sleeping giant is wide awake.