It's pretty hard to single out one retail stock to buy for 2019, but if you're building a list of such stocks, here's why Target (NYSE: TGT ) and Target stock ought to be at the top of your list.
Target Stock Is Cheap
If you exclude dividends, Target has a negative total return year-to-date through Dec. 27.
That's not bad compared to its discount store peers and the S&P 500 (their total returns are -1.3% and -5.1% respectively), but when you consider that Target stock was trading as high as $88 as recently as Nov. 9, long-time owners of TGT stock must consider 2018 a bit of a downer.
Heading into 2019, Target's forward price-earnings ratio is 11.5 , its price-sales ratio is 0.5, and its price-cash flow ratio is 5.8, all well below their five-year averages.
Maybe Target stock is not as cheap as it was when the shares were trading around $50 in June 2017, but considering its business is doing better (it had $713 million of pre-tax operating income in the third quarter of 2018 versus $611 million a year earlier), Target stock is more attractive than it was 19 months later.
Renovations of TGT Stores Continue
Shareholders of brick-and-mortar retailers expect their companies to invest in the online side of the business. But these businesses also must keep the stores from becoming outdated.
No matter how tired investors are of hearing the words "omnichannel retail," it's the future of all retailers, online and off.
Just as people sometimes still want to visit the movie theater to watch movies, consumers still want to visit physical stores to try clothes on.
Successful retail businesses provide a seamless shopping experience wherever their customers choose to shop.
To that end, Target continues to invest in its stores. By the end of 2018, it will have remodeled 300 of its stores out of 1,800 and expects to have 1,100 made over by the end of 2020.
"Brick-and-mortar retailers need to give consumers a reason to visit stores instead of making online purchases, and, to that end, an increasing number of companies have started investing in stores," Hong Kong-based Coresight Research analyst Albert Chan said in a December research note.
In the first nine months of 2018, Target had $2.87 billion of capital expenditures, a 40% increase over the same period a year earlier.
More importantly, the same-store sales growth of stores that have been remodeled tend to be two to four percentage points higher than the stores that haven't had makeovers.
Long-term, if the trend keeps up, owners of Target stock should be very happy with the return on their investment.
In the latest quarter, Target's new smaller-store format contributed 0.6 percentage points of its overall revenue, and most of that represented revenue that wasn't generated a year earlier .
" We refer to these stores as small because of their square footage, but they really punched above their weight because of their high sales productivity," said CEO Brian Cornell on Target's Q3 2018 conference call. "This allows these locations to deliver strong financial returns while allowing Target to reach guest segments we couldn't serve in the past."
While it's easy to think that Target is merely trying to be all things to all people; it's not. It's simply trying to meet its core customers where it's most convenient for them to shop.
Excellent customer service includes being in the places in which the customers live and work.
In Q3, Target's digital sales jumped 49%, contributing 37% of its same-store sales growth.
If you're a glass half-full kind of person, this growth, combined with the fact that its digital sales account for just 6% of its overall revenue, should be very encouraging.
I believe, however, that to be successful in omnichannel, retailers should generate at least 10% of their revenue from digital sources, so Target's got some work to do.
However, the growth trajectory of the company's digital sales indicate that they will constitute 10% of its overall top line by the end of fiscal 2020.
The Bottom Line on Target Stock
The retail business is based on the customers' experience, and on that front, Target's doing all it can to beat Amazon (NASDAQ: AMZN ).
In 2019, Target stock has got to be on your list of retail names to buy.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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