Retail stocks seem to be coming back in fashion for Q2 — and big-box store Target (NYSE:TGT) is no exception.
On the heels of July’s increase in retail sales and strong reports by department store Macy’s (NYSE:M), discount retailer TJX (NYSE:TJX), home improvement warehouse Home Depot (NYSE:HD) and luxury lifestyle brand Michael Kors (NYSE:KORS), Target’s second quarter was also brimming with good news.
The company posted earnings of $704 million — the same total as last year, but 3 cents more per share thanks to stock buybacks — and saw revenues grow 3.5% overall on a 3.1% increase in same-store sales. Adjusted EPS came to $1.12, blowing away analyst expectations of $1.01.
The sales growth came as the company offered two things consumers love: food and discounts. Target added a fresh grocery component to its stores and increased discount incentives — always a good way to lure in cash-conscious customers — through its REDcard program.
Fresh food, in particular, is a solid addition to the company, as it not only works toward leveling the playing field with Wal-Mart (NYSE:WMT), but also sets the big-box retailer apart from online e-tailers like Amazon (NASDAQ:AMZN), which can’t really offer fresh apples (yet).
Going forward, expansion will continue to be the name of the game.
Target went small this year, squeezing its big-box format into cities to draw in more shoppers, and it apparently worked — the company was “very pleased” with how its first three CityTargets performed. So now, the company is going big with that same small format. Target is planning to expand its stores outside of the U.S. for the first time by opening up locations in Canada, where the CityTarget model likely will be employed.
All the new additions — at home and abroad — have one simple goal: continue boosting sales.
But sales growth isn’t really what Target should be worrying about, considering last quarter’s same-store sales set a six-year record for growth, and total revenue has increased in each of the past four quarters.
No, the bigger concern for the company should be its margins — which have declined for the past eight consecutive quarters. The problem? The very offerings boosting sales growth — fresh food and appealing discounts — also are eating away at the company’s profitability.
Its credit card unit also saw profitability drop significantly in the second quarter, with income falling around 18% year-over-year and bad debt expenses doubling. Target is once again planning to look for a buyer for its credit card portfolio, though, after postponing plans for a sale at the beginning of the year.
That’s not to say that Target is in dire straits. The gross margin decline in the second quarter was only 30 basis points less than the year before, plus the company raised its earnings outlook for the rest of the year, which hasn’t been a common theme this quarter. Target now expects as much as $4.40 a share for the year — 10 cents better than earlier expectations and Wall Street’s expectations.
Indeed, investors aren’t worrying. The stock was mildly cheered to 2%-plus gains in Wednesday afternoon trading, improving TGT’s gains to 25% year-to-date and up 33% in the past 52 weeks.
Target has produced steady growth and averaged 50% gains since the depths of the financial crisis. And if retail really is getting back on track, Target’s fashionable lines should only become more appealing to customers.
Investors can find plenty of appeal in Target stock, too. TGT trades around 13 times forward earnings, a bit better than rival Wal-Mart’s 14 and far more appealing than Costco‘s (NASDAQ:COST) bloated 22.
The company also offers a respectable, if not remarkable, 2.2% dividend yield. But there’s consistency and growth in that number. Target has more than doubled its payout since 2008 to a current 36 cents quarterly, and it has been writing dividend checks for roughly 30 years.
If the expansion into Canada goes as planned, Target should be able to offset those weakening margins and easily hit double-digit earnings growth that’s expected in the next few years. Add in a fair price and some incentive to hold on, and you’re out of reasons not to put TGT stock in your cart.
As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.