Upscale discount retailer Target Corp. (NYSE:TGT) is one player in the retail industry that investors are starting to reconsider. TGT stock has made its way 14% higher over the past six months and many are wondering if this could be the start of something larger.
Especially since it’s a cold hard world out there for retailers right now with the majority of the industry’s biggest names facing declining store traffic, slowing sales and for some, the threat of bankruptcy.
It’s not all doom and gloom though, as consumers loosen their purse strings and retailers focus on turn-around plans, even some of the industry’s biggest losers are starting to show signs of life.
The Bull Case for TGT Stock
There is definitely a case to be made for buying TGT stock. Unlike Amazon.com Inc. (NASDAQ:AMZN) or Wal-Mart Stores Inc. (NYSE:WMT), Target’s turnaround is only in its early stages.
Target stock trades at just under 13 times its earnings- double Wal-Mart’s P/E of nearly 26. Investors haven’t quite accepted Target back into the fold and for that reason the firm’s share price is discounted.
A lot of investors are willing to take a chance on TGT stock because of the firm’s respectable 3.96% dividend yield. Not only is that a reasonably high dividend yield for the sector, but the payments are relatively safe, at least for now.
Target has a payout ratio of 51%, so investors can assume that the dividend payments aren’t going away in the near-term.
Like the rest of its peers in the retail industry, TGT is fending off advances from Amazon and working to cement its place in the sector. The firm has been working to improve its online offerings and improve in-store customer experiences with lower prices, new fashion lines and a revamped store format.
The changes appear to be paying off as well- the most recent TGT earnings report showed that customer traffic was up 0.9% so far this year and online sales have increased by 4.3%.
The Bear Case
Yes, the TGT stock dividend is enticing, but for me it ends there. The company’s long-term prospects look bleak and although I commend management’s efforts to turn things around, I’m not sure that Target is going to make it through the retail apocalypse unscathed.
The improved store traffic and ecommerce growth look great on paper, but combined with management’s lackluster guidance for a tepid holiday quarter, they don’t look so promising.
Target is expecting revenue to come in pretty much flat in the fourth quarter, which is a big deal when you consider the fact that the holiday shopping season pretty much makes or breaks most big-box retailers like TGT.
The overarching problem for TGT stock is that the company doesn’t seem to fit in to the future of brick-and-mortar stores. As fellow InvestorPlace contributor Luke Lango pointed out, in-person shopping won’t go away completely, but the number of brick-and-mortar retailers will shrink considerably. The question is which ones will be left standing.
Target has carved out its own space within the industry, boasting upscale-discount items. TGT essentially put itself on the map by making its brand a higher-quality rival to Wal-Mart. Unfortunately for Target, that’s also a role that Amazon fills.
Amazon will unquestionably continue to thrive in the new normal of retail, and WMT also looks poised to thrive, but Target doesn’t seem to have a clear position in the future.
The Bottom Line
Target is unlikely to go out of business any time soon, but the firm is stuck between a boulder and a mountain. Simply offering shoppers an alternative to WMT is no-longer enough and so far we haven’t seen the company do much to differentiate itself.
While some look at the TGT stock share price and see a discount, I think the stock is actually fairly valued when you consider the company’s uncertain future.
At very least, I think management’s conservative guidance for the fourth quarter suggests that growth issues will persist throughout 2018.
Target’s relatively secure dividend means holding on to TGT through another turbulent year could be worth it, but I certainly wouldn’t take up a new position until the firm paves a clearer path for the future.
As of this writing, Laura Hoy was long AMZN.
