3 Reasons Target Corporation Stock’s Comeback Looks Legit

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Target stock - 3 Reasons Target Corporation Stock’s Comeback Looks Legit

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Target Corporation (NYSE:TGT) looked to be on the brink of disaster just a year ago. But over the past few months, Target stock has been making significant upward progress.

Operating in the retail space over the past few years has been a risky business as online shopping and shifting customer preferences made the industry a particularly uncertain one. Now, surviving retailers have had to revamp their strategies to go toe-to-toe with e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN), and the results of those turnaround efforts are starting to become clear.

Target is one such retailer that’s had to make some hard decisions to keep up with larger peers. And while TGT is still facing some serious challenges, there’s certainly reason to believe that the worst is over for the one-stop shop.

Profits Are Hurting, But That’s Par for the Course

Perhaps the most worrying thing for Target stock investors has been the company’s falling profit margins.

In the fourth quarter, management cheered sales figures that had improved by 10% year over year. However, those gains came at the expense of another very important metric — profits. During Q4 Target’s gross margin came in the lowest it’s ever been in two decades. Not only that, but management believes 2018 will have more of the same.

That worried investors, and rightfully so. Sales don’t mean much if they’re not profitable right? The thing is, in today’s retail landscape, that’s not necessarily true. Right now everyone is making sales at the cost of profits because they’re trying to grab a slice of the e-commerce pie. Fulfilling online orders is costly for most companies because they don’t have the infrastructure set up yet.

Competing with the likes of Amazon means fast delivery, in stock items and low prices. That kind of combination, unfortunately, means digital sales often eat in to profits quite a lot.

Online Sales Are Growing

There’s a silver lining, however. Target’s efforts to grow its digital presence at the expense of profits are paying off. So although it’s important to keep an eye on the firm’s profitability, it’s encouraging to see that their strategy is working. E-commerce sales were up 29% for the quarter, which bettered rival Walmart Inc.’s (NYSE:WMT) online-sales growth.

Those improvements in online sales are vital to Target’s longer-term success. Without them the profitability issues would be enough to make Target stock a sure-fire sell. However, right now Target is setting itself up to be a convenient shopping destination both in-store and online. Much like Amazon in the early days, Target has to prove to people that it has what they need for a reasonable price.

Once Target has set up its distribution channels and its customers have come to rely on it’s online presence as a convenient way to get what they need, the profitability issues can come into focus. For now, however, Target is doing the right thing by growing its online presence at any cost.

Target’s healthy cash flow and improving sale metrics should be enough to convince investors that its fight against Amazon is worthy.

Target Stock Pays a Strong Dividend

The fact Target stock is back on track doesn’t mean the next year won’t hold some volatility. For one, holding a retail stock is risky by nature. But — more importantly — a company like TGT that’s in the middle of orchestrating a comeback is almost certain to face some volatility. With profitability likely to be a concern throughout the coming year, Target stock will likely suffer from some bumpiness around its earnings reports.

However, the company offers investors a pretty sweet dividend payment in exchange for their patience. TGT has a 3.43% dividend yield, and the firm has a long history of consistently raising that figure. Target’s strong cash flow means those payments are relatively safe — even if the sector is hit hard again in the months to come.

The Bottom Line for Target Stock

TGT stock still has some work to do. But so far the company appears to be making all the right moves.

While Target may never be able to completely shrug off Amazon’s advances, the company looks poised to defend itself adequately.

As of this writing, Laura Hoy was long AMZN. 

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/target-stock-comeback-looks-legit/.

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