Bull of the Day: Target (TGT)
Target (TGT) successfully expanded its e-commerce offerings over the last several years to help fend off Amazon’s (AMZN) encroachment and prepare for a retail world were digital and delivery continue to grow in importance. TGT shares have now jumped 25% in the last month, as Wall Street gushes over its recent blowout second quarter financial results and the retail power’s ability to shine during the pandemic.
E-Commerce & COVID-19
Target, like nearly every other retailer, has invested in bolstering its e-commerce space. TGT’s push includes a slew of same-day services such as in store pickup, Drive Up, and Shipt—its same-day delivery offering.
Target’s first quarter revenue climbed 11.3%, with comparable sales up 10.8%. This marked its strongest expansion in over a decade as shoppers stocked up on items during the early days of the coronavirus.
The Minneapolis-based firm then posted 25% sales growth in the three-month period ended on August 1. More specifically, Target’s Q2 comparable sales surged by a company-record 24.3%, with digital comps up 195%.
TGT’s same-day services, which includes delivery and curbside pick-up, soared 273%. Despite the pandemic, Target posted one of its strongest quarters of in-store comps on record, up 10.9%.
Target’s adjusted EPS figure soared 86% to crush our Zacks estimate by over 100%. Investors should also note that its operating margin climbed from 7% in Q2 FY19 to 10%, which topped Walmart (WMT) and Amazon. TGT’s improved margin was helped along by solid growth from all of five merchandise categories, as higher-margin discretionary sections such as apparel returned to growth.
In terms of month-by-month growth, Target’s comps were up 33% in May, as Target and other retailers benefitted greatly from their status as “essential.” Now more retailers have started to return to something close to normal operations as consumers and businesses learn to adapt to Covid-19.
But its growth didn’t fall off a cliff. In fact, Target’s comps climbed by roughly 20% in both June and July. This showcases stability beyond pandemic-boosted spending, which was helped along by stimulus checks.
It’s also worth noting that Target has been able to keep and attract more younger consumers, unlike department stores such as Macy’s (M), through trendy lines of affordable furniture, home décor, and fashion. And its flagship grocery brand, Good & Gather, has built strong momentum since its launch in September 2019.
All of this has helped Target stock jump to new highs of around $155 a share, where it sits at the moment. TGT shares are up 20% in 2020 and 180% in the past three years to top Walmart and its industry. Despite the climb, Target trades at a discount, as it has for years, to its peer group, which includes Costco (COST), Dollar General (DG), and others, at 20.6X forward earnings vs. 39.1X (WMT rests a 24.1X).
Back in early June, Target announced that it raised its quarterly dividend by 3% to $0.68 per share. Target’s 1.77% dividend yield tops Walmart (WMT) and the S&P 500’s average at the moment.
Looking ahead, Target’s top and bottom line growth is expected to slow, with the worst days of the coronavirus hopefully in the rearview. Our current Zacks estimates call for 4.2% revenue growth in both the third and fourth quarter. This represents a return to more normalized top-line expansion.
Meanwhile, its adjusted third quarter earnings are projected to pop over 10%. And its adjusted fiscal 2020 EPS figure is expected to jump 12% on 7.3% higher sales, which would represent its best sales growth since 2013.
Target’s longer-term earnings outlook has also turned far more positive since its August 19 release, with its FY20 EPS estimate up 44% and FY21 up 15%. This strength helps Target earn a Zacks Rank #1 (Strong Buy) right now. TGT also holds “A” grades for Growth and Momentum and a “B” for Value in our Style Scores system.
TGT’s Retail - Discount Stores industry rests in the top 19% of our more than 250 Zacks industries. All that said, Target appears worth considering. Some might feel it’s prudent to wait for a pullback, but longer-term investors don’t need to try as hard to find the best entry points.
Plus, it's worth remembering that Wall Street seems focused at the moment almost entirely on companies that are able to grow during the broader economic downturn. Target also stands to benefit for years to come from the growth of both e-commerce and in-store shopping, because physical retail is hardly dead.
For instance, e-commerce accounted for 16.1% of total U.S. retail sales in the second quarter, according to the U.S. Census Bureau. This is up significantly from Q1’s 11.8% and the year-ago period’s 10.8%. And overall e-commerce sales surged 45% from the prior-year quarter, while total retail sales dipped 3.6% in the second quarter.
Yet, some might have expected that 16% of total retail sales figure to be far larger given that the coronavirus created what is nearly the perfect storm for e-commerce to dominate.
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