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The Really Dumb Reason Why Target Stock Is at Risk

Ordinarily, you’d imagine that a trade war with the world’s second-biggest economy would be net negative for the retail industry. But for big-box retailers like Target (NYSE:TGT) and Walmart (NYSE:WMT), 2019 has been one of the best years so far. Since January’s opening price, Target stock finds itself up over 71%, while WMT has gained a respectable 29%.

TGT Stock: Beware Near-Term Valuation on Target Stock
Source: Robert Gregory Griffeth / Shutterstock.com

That said, not all big-box retailers have found the current environment favorable. A notable example is Big Lots (NYSE:BIG), which appears to have finally found a bottom. However, it took a loss of nearly 20% before investors apparently saw some contrarian value in its shares. So, what makes TGT stock stand out in what should be a broader headwind in retail?

Primarily, I believe that Target owns a moat in the big-box space. Like sector king Walmart, TGT offers discounts to shoppers thanks to its vast scale. It’s also a one-stop shop for various needs, including groceries, health and wellness products, clothing, and electronics. Unlike Walmart, though, Target caters to a more affluent customer. Therefore, Target stock levers an economic cushion similar to Costco Wholesale (NASDAQ:COST).

Furthermore, because Target owns a moat, it’s able to dictate favorable terms with its suppliers. While other retail companies desperately explore ways to minimize customer impact from the U.S.-China trade war, Target imposes its solution: bluntly, management tells its suppliers to foot the bill.

While that might sound like a net negative for TGT stock due to a combative relationship, Target has been doing this for years without recourse, as the charts demonstrate.

But before you think Target stock is unstoppable, you might want to consider the retailer’s inventory overflow situation.

Target Stock Vulnerable to Operational Risk

Earlier this month, Business Insider broke a disturbing story about Target’s in-store operational efficiency, or lack thereof. Recently, management quietly cut overnight and backroom shift hours in stores across the nation. Apparently, this was done to increase floor support for customers.

However, this move had an unintended consequence. With fewer workers – which Target refers to as “team members” – manning the backroom, the inventory overflow has become untenable. In some cases, heaps of products are stacked on top of each other, making the backroom a fire hazard. Also, guest photographs reveal that excess inventory sometimes spills out into the salesroom floor.

Here’s the dirty little secret: even in the best of times, Target’s backrooms – where I once worked during my college years – were shoddy. In order to get thing done on time, many workers cut corners on safety protocols.

Ordinarily, such a situation shouldn’t impact TGT stock. After all, I’m fairly certain that all big-box retailers experience these inefficiencies to varying degrees. However, I’ve never seen anything like what Business Insider recently reported.

The magnitude of this problem is such that I believe it can negatively impact Target stock if left unchecked. While most folks consider backroom duty as a lowly job, it’s an important one for Target. Without hardworking and competent backroom team members, a store will constantly encounter inaccurate inventory counts. Eventually, that leads to very angry guests, who may take their dollars elsewhere.

Plus, let’s talk about the obvious: these are large-scale worker’s comp cases ready to drop Target stock at a moment’s notice. During my Target tenure, I witnessed team member injuries occur in clean backrooms. What we’re seeing here is beyond the pale.

The Root of the Problem Remains Unresolved

To be fair, Target responded immediately to the backroom overflow problem. However, responding to a situation doesn’t necessarily equate to forwarding an effective solution. Instead, the root cause – cutting overnight and backroom hours – remains unresolved.

Indeed, Target’s response – sending safety inspectors and demanding changes – may exacerbate the inventory overflow. That’s because the team members responsible for the clean up are probably overworked as it is. With headquarters raising wages but cutting hours, the company is forcing out many well-trained employees.

And with the craziness that the remaining team members are tasked to resolve, the attrition rate will surely spike. Thus, an effort to cut overhead will negatively affect operational efficiencies and accuracy.

Let’s also note that the busy holiday shopping season is only a month away. If Target doesn’t get their act together quickly, TGT stock is at risk for completely dumb and avoidable reasons.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/the-really-dumb-reason-why-target-stock-is-at-risk/.

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