Retail giant Target (NYSE:TGT) didn’t disappoint investors in its highly anticipated holiday numbers report on Thursday. With results that largely surpassed expectations, TGT stock initially popped.
Then, retailing peers Kohl’s (NYSE:KSS) and Macy’s (NYSE:M) reported much-softer holiday numbers, implying that not all was well this holiday season. Recession and consumer spending fears were reignited. Everyone forgot about Target’s blowout numbers as the whole retail sector dropped, even TGT stock.
Make no mistake. This post-holiday sales dip in Target stock is a buying opportunity.
Still a Hot Retail Story
Target’s holiday sales report was excellent across the board. Strong comparable sales increases. Strong traffic growth. Price increases. Continued huge digital sales increases. Promising signs that new omni-channel initiatives are improving the sales trajectory. Management maintained its guidance.
Overall, the holiday report was very good, and underscored that Target remains the hottest story in retail.
Meanwhile, TGT stock is still undervalued relative to its long-term growth potential. But, it had rallied more than 15% in the two weeks leading into the holiday sales update. So, a near-term pullback is warranted, and nothing more than an opportunity to buy an undervalued stock on a healthy selloff.
Target’s Seeing Growth in all the Right Areas
Comp sales increased 5.7% in the November-December period. That’s a really strong number. Coming into the holiday period, Target reported 5%-plus comparable sales growth in the third quarter, and that was a near-decade high. Kohl’s holiday comp of 1.2% and Macy’s 1.1% number paled by comparison. Also, Target’s 5.7% 2018 holiday comp is better than the 3.4% 2017 holiday comp that investors remember as the catalyst number that kick-started a huge rally in TGT stock from $60 to $90.
Overall, this year’s holiday comp sales increase is simply outstanding.
Importantly, growth came from all the right areas. Most of the increase came from higher traffic, so Target isn’t relying on price hikes to drive sales growth. The digital channel saw sales increase nearly 30%, marking yet another quarter of 25%-plus digital sales growth. Indeed, the company is now on track to report five consecutive years of 25%-plus digital sales growth.
Within that red-hot digital channel, growth is being driven by the company’s new omni-channel initiatives like Store Pickup and Drive Up. Those efforts were up more than 60% year-over-year, and accounted for 25% of the company’s total digital sales during holiday 2018.
All together, Target’s holiday report checked all the right boxes. Big comps? Check. Traffic increases? Check. Strong digital sales? Check. New initiatives gaining momentum? Check.
From head to toe, it was all checks, and that means that Target remains the hottest story in retail today.
TGT Stock Is Undervalued
Target stock won’t remain red-hot forever. But, the bull thesis is that the company is building a sustainable omni-channel foundation to grow sales and earnings at a healthy rate over the next several years. At the moment, this omni-channel driven growth potential is undervalued by the market.
Long term, this is a stable 2% revenue growth company with stable gross margins and room for opex leverage through stable sales growth and cost-cutting automation initiatives. If you put that all together, Target has a realistic opportunity to hit $7 in EPS by fiscal 2023. A historically average 16x forward multiple on that implies a fiscal 2022 price target of $112. Discounted back by 10% per year, that equates to a fiscal 2018 price target north of $75.
Target stock trades under $70 today. Thus, TGT shares are reasonably undervalued.
Moreover, this reasonably undervalued stock has rallied in a big way over the last two weeks, gaining more than 15% in anticipation of strong holiday numbers. After such a huge rally, the stock needed cool down. Now, it’s cooling down and doing so against the backdrop of strong fundamentals and an attractive valuation.
Put all that together, and you have a compelling “buy the dip” situation in Target stock.
Bottom Line on TGT Stock
Target is the hottest company in retail right now, and is coming off a record holiday season that underscores just how well this company is doing at the present moment. TGT stock is selling off because of bad reports from Kohl’s and Macy’s. But, that’s just noise. Eventually, that noise will be muted, and Target stock will resume its rally. When it does, upside to $75-plus levels looks likely.
As of this writing, Luke Lango was long TGT and M.