Investing in Target Corporation (NYSE:TGT) this year has felt like riding a roller coaster. Target stock rose by over 15% during the first four months of the year. But it has given up almost all that gain on the back of a series of events, including depressing financial results, political stance and company policies. Year-to-date, TGT stock has risen only 0.3%.
It’s just a few days until 2017 and the question now is if Target management will be able to turn things around in 2017.
The truth is we’ll have to wait and see. However, given the trend at the moment, there’s not much cause for optimism.
Here’s why.
Relatively Sluggish Historical Earnings Improvement
With regards to earnings, the attention of the investment public has been fixed on the declining sales in 2016. TGT stock has seen its revenue decrease by over 4.5% over the past year. This is also making it difficult to grow the bottom line.
However, the reality is that Target stock has been lackluster at growing its top line over the last ten years.
As the chart shows, TGT stock hasn’t been growing its top line as fast as its competitors have. Wal-Mart Stores, Inc.’s (NYSE:WMT) 39.47% revenue increase in the last ten years makes it seem TGT isn’t faring badly. But its noteworthy that the 39.47% revenue increase by WMT yielded over $136 billion, which is considerably more than what any of the companies on the chart currently makes. So the real story is that Target stock is finding it difficult to grow.
As for 2017, there aren’t any significant moves in place that could disrupt this unfavorable status quo. In fact, it seems TGT management lacks judgment as to where it should focus.
TGT Management’s Misplaced Lack Focus
During the third-quarter earnings call, management said that Target stock has exceeded its $2 billion cost savings goal over a two-year period, just before the end of the second year. While I’m a big proponent of cost savings, I believe that TGT management was not very smart to focus on cost cutting. As I said earlier, its revenue growth is unimpressive relative to its competitors. And what it should be doing is investing drastically to close the widening gap between itself and its competitors, something that cost savings would hardly achieve.
Worse off, the cost saving initiative isn’t yielding a good enough earnings growth. Of course, TGT stock has significantly outperformed its competitors at bottom-line growth over the last three years. But, when compared over a ten year period, the recent cost-savings inspired earnings growth still puts Target’s profitability in line with the trend over the past decade.
Simply put, the cost savings initiative is unlikely to improve TGT stock’s profitability significantly in the near-term.
Moreover, of its two biggest competitors — WMT and Costco Wholesale Corporation (NASDAQ:COST) — Target stock has the lowest total expenses by a wide margin.
Essentially, there doesn’t seem to be any big pressure to focus on cost cutting. Looking at the way things are with its competitors, its sole focus should have been on growing its topline.
Its recent bathroom policy also shows poor judgement by management. It was unwise to publicize the bathroom policy. The reality of things is that just about every other company allows transgendered folks to use the bathroom of their choice … much so, without having to interfere or even saying anything about it.
Target stores aren’t airport security checkpoints where you’d have to go through a scanner that could figure out who is and who is not transgender. A transgendered person has the physical appearance of the gender they claim, so it will be difficult to tell firsthand who is transgender at a bathroom door. Therefore, putting the policy in the press was unnecessary. While it would be shallow of anyone to advise against buying Target stock based on this press play, it reinforces the concern that TGT management lacks judgement.
Bottom Line on Target Stock
The biggest strength of TGT stock at the moment remains its impressive dividend history, which has been increased consistently over the past 49 years. And that’s the only rationale for buying Target stock in 2017, as it’s unlikely that 2017 will bring drastically better earnings performance.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
