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Why You Should Be Bullish on Target Stock (TGT)

Target (TGT) has made some serious missteps in the last few years, generally falling out of consumer favor since 2008, with its failure in Canada forcing TGT to take its lumps and move on.

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It has been a year since Brian Cornell took the reins as Target’s CEO, however, and in that time Target stock is up about 37%.

Despite Forbes finding Cornell lacking “innovative pizazz,” the new CEO has led Target to beat earnings in the last three quarters he has overseen. And the now underdog retailer from Minneapolis is expected to grow earnings per share 44% this quarter and 59% the next.

Though Target’s failure in Canada cost the company some $5 billion, and the company is facing an uphill battle to attract a younger crowd into its stores, I’m still bullish on Target stock, and you should be, too.

Exclusives Are Making Target Attractive Again

Trading at 20 times earnings, Target needs to draw consumers into its stores in droves if it wants to grow the TGT stock price. To this end, Target is transitioning back to the model that made it a success to begin with — collaborating with designers to put exclusive merchandise on its shelves.

Target has played this game before, and ranks among the most noted retailer/designer collaborators with partnerships from Missoni Luella to Zac Posen and Isaac Mizrahi. Target’s recent collaboration with Lilly Pulitzer had people lining up around the block, selling out both in stores and online just hours after entering TGT stores.

There’s a another side to this coin, though. Responding to consumer disappointment with the brisk sales TGT’s collaboration with Missoni, TGT overcompensated with its Neiman Marcus collection and wound up with an abundance of merchandise it had to deeply discount to move out its stores.

These kinds of partnered fashion lines were since given a death sentence, but TGT seems to have found the sweet spot in price and demand to boost the attractiveness of its stores. Target’s next collaboration with Eddie Borgo, scheduled to hit shelves on July 12, will be the telling point of the future of Target’s new, yet familiar, direction.

Luring Millennials with Lean Eats

In recent years, Target began resembling Walmart (WMT) by going for lower margins and packing its stores full of cheap groceries. Under Cornell’s guidance, TGT is doubling down on organic and natural foods, expecting $1 billion in sales 2015 alone.

The organic space is growing fast, and TGT faces a number of competitors like Whole Foods (WFM), Farmers Market (TFM), Sprouts (SFM) and Kroger (KR), all of which could put pressure on Target stock. Grocery revenue accounts for one-fifth of TGT’s annual sales, and Cornell’s background with companies like Pepsi (PEP), Safeway (SWY) and Sam’s Club means he’s got the experience for the job.

Target is differentiating its food offerings by separating them into “signature,” “outperform” and “perform” categories. TGT’s signature selections get the majority of Target’s resources, and include baby, children, style and wellness.

This means Target is cooling it on several major brands like Campbell (CPB), General Mills (GIS) and Kellogg (K) to make its City Target line more appealing to a younger crowd that is more interested in Beyonce’s vegan diet than it is scarfing down hot pockets.

Online Sales Vital for Target Stock

Target’s online sales are vital to the company’s growth, and that’s why TGT established digital channel sales separately in its most recent quarterly report, showing a 38% increase in online revenue. That kind of growth is good news for Target stock.

Target’s REDcard is crucial to both in store and online transactions, as REDcard holders spend 50% more and visit TGT stores twice as much. Only about 20% of TGT customers are REDcard holders, meaning there’s potential for increased sales as TGT gets more customers using the card, which provides free shipping, 5% off in stores and online, and discounts on prescriptions.

The Bottom Line

Target CEO Brian Cornell is putting Target back on the right track. By closing 133 Target locations in Canada, Cornell proved he isn’t too egotistical to pull back and take stock of his corporation’s mistakes.

Target last beat earnings with $1.10 per share of Target stock and $17.12 billion in revenue against estimates of $1.03 per share and revenue of $17.08 billion. Target expects Q2 earnings of $1.04 to $1.14 per share, and TGT anticipates full year earnings of $4.50 to $4.65 per share, upping its previous guidance of $4.45 to $4.65.

And let’s not forget that Target stock offers a 2.6% dividend yield, and although its high payout ratio leaves some skeptical TGT can continuously increase its dividend; TGT is a Dividend Aristocrat, after all.

As long as Target’s new initiatives continue to boost TGT earnings and fatten its margins, I’m confident Target stock will see solid long-term performance.

As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/target-stock-tgt-bullish/.

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