Discount retail heavyweight Target Corporation (NYSE:TGT) reported robust holiday sales numbers, and those numbers are good enough to imply that Target stock could be due for a massive run higher in 2018.
You wouldn’t guess as much by looking at the stock today. Target stock is actually down 4% as of this writing. The retailer missed earnings expectations by a penny, and although the miss was tiny, the company’s margins in the quarter weren’t that pretty. Indeed, Target just reported its lowest gross margins in the holiday season in 20 years.
That’s no good. But it’s also backward looking. Margin compression has been a headwind at Target for the past several quarters as digital investments and wage hikes have pressured the bottom line. But management clearly expects things to get better in 2018, as the company is guiding for stabilization in core earnings in 2018 (excluding tax reform).
Meanwhile, all signs point to a massive turnaround for TGT on the top-line. After getting its butt kicked by Walmart Inc (NYSE:WMT) in 2016 and 2017, TGT looks ready to bounce back and re-gain lost share in 2018.
All in all, Target stock is a name you want to own in 2018. This company is in the early innings of a multi-quarter turnaround, and the stock is dirt cheap. That combination should lead to healthy gains for TGT stock in the year ahead.
Get Ready for the Target Stock Turnaround
Some will say that the turnaround in TGT stock started earlier in 2017, when comparable sales growth flipped from negative to positive for the first time in over a year. That may be true, as Target stock has rallied ever since then. But I still think we are in the early innings of Target’s turnaround.
Why? Because Target just reported a better quarterly comp (+3.6%) than Walmart (+2.7%) for the first time since the first quarter of 2016, so essentially two years.
That is a pretty big deal. If you look back a couple of years, you will see evidence supporting the fact that this isn’t just a single quarter anomaly. Rather, it could be the start of something big. Whenever TGT comps are better than WMT or vice versa, that trend tends to persist for multiple quarters.
For most of 2012-13, Target comped better than Walmart. In late 2013 and early 2014, Walmart comped better than Target. For most of 2014 and all of 2015, Target comped better than Walmart. And in 2016-17, Walmart comped better than Target.
Now, at the tail-end of 2017, Target is comping better than Walmart. If historical trends hold up, this should be the beginning of a multi-quarter stretch wherein Target puts up better comps than Walmart.
There is also more to this thesis than historical trends.
Across the board, all signs point to the script flipping in favor of Target. For the first time in multiple quarters, Target’s digital sales growth (+29%) outpaced Walmart’s digital sales growth (+23%). Considering everything is going digital, this is a pretty big flip. Moreover, Target’s traffic growth (+3.2%) was essentially double Walmart’s traffic growth (+1.6%), and Target comped positive across all five of its core merchandise groups.
Overall, it looks like Target is at the beginning of a multi-quarter stretch wherein the retailer consistently outperforms Walmart. Meanwhile, although everyone is freaking out about margins, things are clearly going to start improving there because core earnings are expected to be stable in 2018. Thereafter, wage hike pressures should be largely in the rear-view mirror, so overall margin pressures should ease significantly.
Bottom Line on TGT Stock
Earnings next year are expected to be roughly $5.30-per-share. Right now, TGT is trading around $73. That means this stock is trading at a rather cheap 13.8-times forward earnings.
That is about as cheap as Target stock has been over the past several years. But comps are strongly positive and accelerating upward. Digital sales growth is red-hot, margins are stabilizing and Target is at the beginning of a multi-quarter stretch of outperforming Walmart.
In other words, Target stock is experiencing a bunch of tailwinds converging against the backdrop of a really cheap stock.
I like that set-up. It means TGT stock could have a big 2018.
As of this writing, Luke Lango was long TGT.