The state of Vermont recently banned the sale of non-essential items in big-box stores such as Target (NYSE:TGT). This means it can only sell items such as food, beverages, animal feed and pharmacy. While it’s going to be a logistical nightmare, it ought to help the retailer focus on upping its grocery game. Long-term, this experience ought to be good for Target stock.
Here’s why.
Grocery Is Key to Its Continued Growth
Matt McCall recently discussed three reasons why Target stock will rise above the pandemic.
One of the reasons has to do with the surge in people eating at home. McCall noted that in March, the consumer price index for food at home rose 1.07% on a year-over-year basis to 244.9 points. That’s on top of a 1.4% increase in the same period a year earlier.
McCall expects April also to be strong. That’s excellent news for Target because it forces the company to focus on the grocery business at a time when the demand for other non-essential purchases isn’t going to be nearly as high.
Last November, I wrote about some of the things Target is doing to boost its grocery business, which only contributed 20% of its overall volume compared to 50% for Walmart (NYSE: WMT).
“Target continues to roll out its Good & Gather brand, which it launched in September. By the end of 2021, it expects to have more than 2,000 items available in stores under its own private label brand name,” I wrote Nov. 20, 2019.
At the time, Target’s grocery business had seen seven consecutive quarters of positive same-store sales growth. In the past three fiscal years, Target’s food and beverage revenues have grown from $14.3 billion in 2017 to $15.0 billion in 2019, a cumulative growth rate of 4.9%.
At first glance, you might look at its grocery business for the last three fiscal years and conclude that it hasn’t been able to increase the segment’s contribution to its overall sales. And you’d be right. It has remained between 19% to 20% of overall sales.
So, this is where the coronavirus comes in.
Because states like Vermont are prohibiting big-box stores from selling non-essentials, in those states, Target’s essentially become a grocery store rather than a discount apparel store that also happens to sell grocery items.
As Stephanie Lundquist, the head of food and beverage for Target stated last November, the company’s food and beverage offerings play a big role in the overall Target experience. By having a more grocery-focused operation in the states that ban the sale of non-essential goods, Target will be able to further refine its grocery offerings.
Ultimately, this on the ground market research will help Target take its grocery business from 20% of sales to 25% or higher.
If you own Target stock, this ought to be viewed as a positive, at a time when some of its stores aren’t going to be able to offer customers its entire inventory.
The Bottom Line on Target Stock
The coronavirus pandemic will not only force Target to up its grocery game; it will help offset potential revenue losses in other areas of its business.
Barclays analyst Karen Short believes Target will be one of the long-term beneficiaries in a post-Covid-19 world.
“Discretionary sales at Target will be awful,” Short told Barron’s recently. “But they will be stronger coming out the back end—Target is in a great position to benefit from retail turmoil.”
The analyst argues that because Target’s shares are down approximately 15% year to date and are trading at just 15 times estimated 2020 earnings, now is an excellent time to be buying TGT. Short has a buy rating on its stock and a target price of $120, providing upside potential of 8% over the next 12 months.
In my November article, I considered Target stock a buy. At the time, it was trading just under $109, which is where it trades as I write this.
“I believe that Target stock could get to $200 a lot sooner than many think, in part because of the strong leadership of Cornell [Target CEO]. He’s taken huge steps to make Target relevant in the grocery business. Those steps ought to start paying dividends in 2020,” I wrote.
“As retail stocks go, I think Target’s upside is far greater than Walmart’s at this point in its development.”
I view Walmart and Target as stocks to buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
