The Target (NYSE:TGT) second-quarter earnings report was a real eye-opener.
Net earnings of $939 million, $1.83 per share, on revenue of $18.4 billion were just part of it.
Same store sales rose 3.4%, and traffic to the stores was up 2.4%. Half of that came from Target’s same-day fulfillment services, and operating profit was up nearly 17% from a year earlier.
The result was a fundamental reassessment of Target by analysts and investors. Shares rose a startling 20% and kept going higher as trade opened Aug. 22. A stock that had never traded over $90 per share was suddenly trading at $105. The Target stock price shot right up.
But has Target really changed, or have analysts just caught up with the decade’s most important retail trend?
Americans Don’t Shop in the Traditional Sense
Analysts looking at the Target numbers waxed lyrically over its “omni-channel” efforts, the idea that Target lets people buy online and either pick up their orders or have them delivered.
But there’s a more fundamental change at work. Americans no longer shop. Americans buy. We make lists. We expect low prices. We consider getting what we need a chore, and want it done quickly.
When we go out, we also want to visit one store for all our needs. We don’t go to a clothing store, a food store, then a drug store or stationery.
This trend is behind the rise of Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN) and Costco Wholesale (NASDAQ:COST). The question was where Target could fit into this new world, or whether it might wither away as department stores like Macy’s (NYSE:M).
The second quarter proved to analysts that Target has found its niche, and that it’s a sustainable one.
Target will deliver clean stores close to where people live, increasingly in densely-packed cities. CEO Brian Cornell says his turnaround for the company is still in its early stages.
While many analysts think Cornell’s Target is Walmart or Amazon, it’s also Costco. Cornell recognized that convenience isn’t just about e-tailing. It’s also about being nearby, selling basics people need in quantities small enough to bring back to modern apartments.
While Walmart has mostly abandoned small-format stores, Target has gone all-in, with 30 new sites each year placed close to college campuses and other urban employment centers.
Store Brands Boost Earnings in TGT Stock
Cornell’s strategy for maintaining margins is to build store brands so that what he makes competes directly with what he buys.
The company’s new grocery brand is Good and Gather, which is being sold as a wellness brand in its grocery aisles. Target’s grocery sections are usually smaller than those of rivals, with fewer fresh products.
Good and Gather joins the successful Cat & Jack kids’ line and dozens of other store brands including Smith & Hawken, bought in 2010.
Store brands offer fatter margins than name-brand merchandise. Stores which, like Costco, deliver quality in their store brands, get a double earnings boost.
Bottom Line on Target Stock
Analysts were reluctant to give Target stock the kind of price multiple given Walmart because they didn’t think it fit into Walmart’s world.
Walmart sells at 25 P/E, and even with its fat Aug. 21 gains Target stock is still selling for under 18 times earnings. Its dividend yield is 2.56%, against less than 2% for Walmart.
Walmart’s market cap is 62% of its 2018 revenue, while Target’s recent gains mean it’s selling for 72% of last year’s sales. Target remains just 14% of Walmart’s size, but analysts now think it can play in Walmart’s league. That’s a huge change in sentiment, and it means Target stock may keep rising.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.