With a market cap of $50 billion dollars, Target (TGT) is the clear number two general merchandise big store retailer in the US, following Wal-Mart (WMT).
The company has a storied history, and a strong track record to go with it. With more than four decades of annual dividend increases, it’s a company that investors could long rely on for both growth and income. A series of setbacks have hit the company in recent years however. Is now the time to move into TGT stock?
TGT Stock: Pros
Relatively Cheap: TGT stock is trading at a reasonable PE ratio of 15. Compared to the broader S&P 500, that’s a nice discount. The S&P 500 is currently trading at above 20x earnings. 15X earnings is historically around average for a blue chip company. So Target shares aren’t historically a great bargain, but compared to today’s prices, they looks good.
Compared to the retail sector, Target’s valuation is in-line. The S&P Retail ETF (XRT) trades at 15x times earnings, as does Wal-Mart. You can make a decent case the whole sector has been put on sale as investors breathlessly bid up Amazon.com (AMZN). If Amazon doesn’t do as much damage to brick and mortar retail as expected, the whole sector could do well. In any case, TGT stock would benefit.
Strong Dividend History: Target stock has been a great holding for patient income seekers. For just shy of a half a century, Target has boosted its dividend each and every year. At current levels, it pays a 2.7% yield. This slightly trails Wal-Mart, which pays 3%, but it is still a nice income source.
Up until 2012, the company had grown earnings at 9% a year over the previous decade. The failure of Target Canada (discussed below) and the credit card breach hit recent earnings. But if Target gets back to its historical performance level, there will be plenty of room for both TGT stock and its dividend to keep moving upward. The new CEO hire may help.
Focusing On The Core Business: Target has been hit by a string of problems in recent years. Target Canada didn’t work. A security breach caused the company’s credit card unit to take a large hit. And the company’s online efforts are struggling. One could argue TGT management had too many irons in the fire.
Target is now simplifying. It sold the troubled credit card business. That reduces both financial and reputational risk to the business. The company closed the poorly performing Canadian unit.
It also sold its in-store pharmacies to CVS Health (CVS) for almost $2 billion. CVS gets 1,672 attractive stores inside Target locations. They will be rebranded during the course of 2016. Target in return gets a nice chunk of cash, and gets out of the pharmacy business. This segment is quite different from its core retail operations.
You can’t shrink to success indefinitely. But sometimes, lightening up on your weaker assets allows the stronger operations to shine. And the money Target is receiving for the divestitures is set to go for stock buybacks. TGT stock could benefit from these moves.
TGT Stock: Cons
Online Platform Weak: Target has not managed the digital transition well. Online sales still account for only about 3% of overall sales. That’s a very poor showing.
And 2015 was not a banner year for the company’s online efforts. TGT had aimed to grow its online sales by 40% in 2015. Instead, it barely managed to do half that. It’s one thing to miss expectations by a bit. It’s another to miss that badly. Online is not ramping up the way it needs to. I’m not as bearish on brick and mortar retail as most investors. But still, you need a more meaningful digital presence than what Target has thus far managed.
Canada Expansion Was A Complete Bust: TGT made an aggressive push into Canada, entering the market in 2011. And it moved rapidly, opening 133 stores in its brief time there. Target Canada lost more than $2 billion during its brief run.
The media referred to Target Canada as an “unmitigated failure, “spectacular failure”, and “a gold standard case study in what retailers should not do when they enter a new market.” By 2015, Target Canada was done; it filed for bankruptcy last year.
A business failure happens. That’s part of life. Not all new ideas stick. But Target Canada is particularly bad. It wasn’t a borderline case but rather a totally unsalvageable wreck. How is Target supposed to expand in the rest of the world if it can’t manage the market most similar to the US on the entire planet?
Despite the fact that the disaster is now over, it still has bad implications for TGT stock.
Target is now marketing heavily at Hispanics. But if they couldn’t crack Canada, are they going to do better aiming at a minority shopper that frequently speaks a different language? Say what you will about Wal-Mart, they’ve been reasonably successful in Mexico and Central America. As the United States’ share of the world economy declines, TGT will fall farther behind Wal-Mart, Amazon, and other international retailers.
Smaller Stores Aren’t Promising: Target is trying a more compact store for urban markets. At this point, it feels like Target is just flailing about, trying things almost at random. Canada didn’t work? Alright, let’s see how Latinos like us. Same with these smaller stores.
The issue here is that this isn’t a novel idea. Wal-Mart tried express stores to appeal to markets where big boxes didn’t work. Wal-Mart shut all its express stores. This isn’t because it doesn’t like the concept; it operates plenty of compact stores in Mexico and other foreign markets. But US consumers weren’t buying it.
Target stock owners should be scratching their heads over this one. Instead of learning from Wal-Mart’s failure, TGT is pushing ahead with the same idea. Since Wal-Mart couldn’t swing the concept, despite operating it elsewhere, why would one expect Target to succeed? At best, I anticipate a modest success for the urban store concept, whereas on the downside, it could be another abject failure.
Target Stock: Verdict
I really don’t like Target much. With its weak online platform and inability to grow overseas, I see this company having a seriously unpromising future. The company’s past is great. But current management seems in over their heads. I see dark days ahead for TGT stock if current trends don’t reverse soon.
At the time of this writing, Ian Bezek owned shares in Wal-Mart. You can reach him on Twitter at @irbezek.
