Target Continues to Hit the Bullseye

CEO Brian Cornell continues to deliver the goods

Target (NYSE:TGT) CEO Brian Cornell was hired by the Minneapolis-based retailer on July 31, 2014. Since then, Target stock is up 46%. Not bad for a company that was thought to be losing the discount war to companies like Walmart (NYSE:WMT) when the former head of PepsiCo’s (NASDAQ:PEP) global food business took the job.

Year to date, Target stock is up 16% through March 11, less than four bucks away from $80, a level it’s only seen twice — August 2015 and August 2018 — since Cornell’s been in the top job.

In November 2017, I wondered if Target could hit $80 in 2018.

“Can Target deliver an $80 stock in 2018? It’s going to be even tougher after the latest hit to its share price,” I wrote. “I’ll reserve judgment until after Black Friday, but business does appear to be getting stronger. And that’s all you can ask for as an investor.”

In the 16 months since my comments, Target’s business has come on like gangbusters, but it’s hardly been reflected in its share price.

Here’s why I think that’s about to change.

Business Is Good

Target announced its fourth-quarter results March 5. They were very solid with full-year same-store sales growth of 5.0% — brick-and-mortar up 3.2%, while digital sales increased 36% on a comparable basis — and bottom-line adjusted earnings per share of $5.39, 15.1% higher than a year earlier.

My InvestorPlace colleague Dana Blankenhorn called Target a good yield stock after it reported earnings, but not a good buy if you’re looking for capital gains. I respectfully disagree.

Perhaps it was a mirage, but Target’s traffic and same-store sales growth in 2018 were the best the company’s achieved in over a decade. Furthermore, its adjusted EPS set a record this past fiscal year. Those are hardly the hallmarks of a business in decline.

The fact is, if you exclude the extra week in the fourth quarter of 2017, Target’s Q4 results were significantly stronger than its reported numbers.

On the top line, Target’s revenue was $22.7 billion, flat compared to a year earlier. However, if you exclude $1.62 billion, the average of 14 weeks in 2017, the company’s sales increased by 7.7%. On the bottom line, EPS increased by 12.5%, significantly better than the reported decrease of 23.5%.

Looking ahead, Cornell sees low- to single-digit same-store sales growth in fiscal 2019, with GAAP earnings-per-share growth of at least 6.7%. Both are likely very conservative given the fact that Target’s EPS guidance when it reported Q4 2017 last March was between $5.15 and $5.45 a share.   

With digital sales growing at a blistering pace and traffic better than it’s been in a long time, only a severe correction in consumer sentiment is going to slow Target’s business.

Cannibalization Isn’t an Issue

Taking a page out of the Best Buy (NYSE:BBY) playbook, Target has optimized its retail footprint to meet growing online sales. Some analysts see this move hampering the retailer’s in-store sales. Target doesn’t see it quite the same way.

“Since 2016, we’ve made our stores more productive by using them as fulfillment centers. Our fulfillment sales per square foot have grown at an average 67% rate per year. Now, more than $14 a foot as our stores increasingly support our digital business,” COO John Mulligan said during Target’s conference call. “At the same time, our in-store sales per square foot have grown at a 4% rate per year, which means our Target stores can support incremental growth from without hurting in-store sales.”

Investors have seen firsthand how Best Buy has been able to fend off Amazon (NASDAQ:AMZN) by providing consumers an omnichannel shopping experience that works. Target’s merely doing the same thing. And the fourth-quarter numbers bear that out.

Target’s using its store-as-a-hub strategy to grow faster. Forfeiting a few percentage points — Q4 2018 gross was margin was 25.7%, 40 basis points lower than a year earlier — in the name of growth is a good thing.

Just ask shareholders who’ve held TGT stock for more than a few years.

The Bottom Line on Target Stock

Over the past two years, Target’s capital expenditures have topped $6 billion, as it continues to invest in its business. Take out the impact of the Tax Act and Target’s return on invested capital increased by 100 basis points in fiscal 2018 to 14.6%.

Not everything’s perfect about Target’s business. It continues to struggle with its grocery store business. It’s not so much that it isn’t growing sales — its food and beverage business has increased for six consecutive quarters — but it doesn’t have a coordinated strategy to take its grocery game to the next level.

I believe Brian Cornell and the rest of the Target team are on top of the situation. In 2-3 years, investors won’t recognize the company’s grocery business.

Under $75, I’d be a buyer of Target. Under $70, I’d back up the truck.   

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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