Target stock (NYSE:TGT) has moved sharply higher recently. Target stock was trading at $70.8 on May 16. Within two months, TGT stock surged nearly 25% to its current level of $86.30.
It is likely that market participants booked profits after the significant jump. However, I believe that any further near-term correction in Target stock will create a buying opportunity.
I will discuss the three major factors that make Target stock worth considering on pullbacks.
Consumer Spending to Remain Robust
It is worth noting that consumption accounts for nearly 70% of U.S. GDP and is the key driver of GDP growth.
In June, consumer confidence dropped to the lowest point since September 2017. However, in 2017, GDP growth was well above 2.0%. Therefore, I don’t foresee any meaningful decline in consumption spending.
In addition, the markets are still betting on a potential interest rate cut in July. If the Federal Reserve does cut rates, consumer spending will be boosted.
As a result, cyclical consumer stocks will benefit from higher spending during the holiday season.
The bottom line is that continued economic growth will likely enable TGT to meet its earnings guidance in coming quarters, and that should keep Target stock elevated.
TGT Is Among the Top Omnichannel Retailers
For Q1, TGT reported comparable sales growth of 4.8%, with comparable digital sales growth contributing 2.1 percentage points of its overall comparable sales growth. I believe that the company’s enhanced omnichannel fulfillment capabilities will continue to result in strong comparable sales growth.
Just to put things into perspective, the 2019 Omnichannel Report compiled by research firm Digital Commerce 360 reveals that Target is just behind Walmart (NYSE:WMT) when it comes to omnichannel services.
It is worth noting that Target’s comparable digital sales jumped 42% in Q1. Importantly, same-day fulfillment services contributed to over half of the company’s digital sales growth. TGT’s same-day deliveries are fulfilled through Shipt, and Target has this service in 1,500 of its stores. In addition, the company has 1,000 drive-up stores and free 2-day shipping for a few hundred items.
Another important point is the company’s remodeled stores. According to TGT, the average sales lift of its remodeled stores has been 2%-4%. With 1,000 more stores set to be remodeled by the end of 2020, remodeling will continue to be a sales-growth catalyst for TGT and a positive catalyst for Target stock.
Owned Brands Provide a Differentiating Factor
Retailers have limited ability to differentiate themselves.
One way Target has been able to differentiate itself is investing in its own brands. In Q1, Target launched three new brands. The company currently has 39 private label brands, and these brands are exclusively available at Target.
One-on-one collaboration with popular brands also provides TGT with exclusive products. As an example, British heritage brand Hunter has teamed up with Target. Hunter will sell an exclusive version of its rain boots and protective outerwear to Target.
Creating Value for the Owners of Target Stock
I believe that the sustained improvement of Target’s comparable store sales growth will translate into higher dividends and repurchases of Target stock.
Last quarter, Target declared a dividend of 66 cents, which is 3.1% higher than the prior quarterly dividend. I believe the dividend will continue to rise, boosting TGT stock.
For the year ended December 2018, Target reported operating cash flow of $5.9 billion. With $3.5 billion of capital expenditures, the company reported free cash flow of $2.4 billion. As investment in store remodeling declines in coming years, TGT’s free cash flow will rise. This will also enable TGT to spend more money on dividends and share repurchases.
The company’s margin might remain under some pressure as Target increases the hourly pay of its employees and invests in private labels. However, those negative catalysts are likely to be offset by sustained growth in comparable store sales.
The Bottom Line onTarget Stock
Target stock has surged higher in the recent past, and the rally has been backed by strong fundamentals. TGT stock is likely to undergo a correction after its sharp rally.
I believe that any upcoming correction will be an opportunity to accumulate the stock. The company’s strategy of store remodeling, private labels and omnichannel retailing will boost Target stock in coming quarters.
As of this writing, the author did not own any stocks mentioned above.
