In 2019, Target (NYSE:TGT) shares were a better investment than Walmart (NYSE:WMT). Its small stores and branded clothing delivered stellar results for Target stock through most of the year.
In 2020, Walmart is the better bet. Its stores are essential in middle America, with more fresh produce. Target has been recovering for the last month. So far its stock is down 13% for the year. Walmart is up 8%.
The question is whether, assuming the worst is over with the novel coronavirus, Target’s 2019 momentum will resume. Target shares opened on April 28 at about $110, a market capitalization of $56 billion. That’s a price-earnings ratio of 17.3. Target stock has and with a 66 cent per share dividend yielding 2.5%.
Walmart’s 54 cent dividend, by contrast, yields just 1.7%, and its price-earnings ratio is now over 24.
Target’s Strengths
Target says its online sales have doubled during the pandemic, and digital same-store sales are up 275%. Its Shipt service, which can deliver from stores in as little as an hour, has added 80,000 new customers. Online sales for store pick-up are often as high as on Cyber Monday.
The question is whether in-store sales will soon rebound. CEO Brian Cornell thinks they will because Target offers “one-stop shopping.” People can get everything they need in one trip.
Indeed, foot traffic has picked up in late April, according to Placer.ai. Traffic at Target fell more sharply than Walmart’s in March. But it’s picking up faster, up 19.4% for the third week in April from the week before.
Target’s Weaknesses
Target does have problems.
Target decided to increase wages $2 per hour, to compensate for the risks employees run. The risks are real. Target had added $300 million to its employee budget in March and higher wages will now continue through May.
They may be hard to take back. Employees remain restive. It didn’t help that Cornell and his top executives also got raises along with the workers. Many executives in other industries have been taking pay cuts.
A mass Target “sick-out” is planned for May 1, with employee advocates saying Target’s protection of them represents “half-measures.” Shoppers have stopped taking the pandemic seriously, they say. This is despite stores limiting the number of people allowed in and issuing masks and gloves to employees.
Even before the pandemic hit, however, cracks were starting to appear in Target’s strategy. Its Christmas sales were up just 1.4%, marked by weakness in toys and electronics. Many of Target’s stores in urban centers and near universities are smaller than Walmart locations. The university stores are hampered by the fact that most schools remain closed.
Target is doubling down on this strategy, with 36 new stores, some as small as 6,000 square feet. Some will now look more like those of Dollar General (NYSE:DG), whose stock has also been rising through the pandemic. Target also plans to use more robots for stocking shelves and open new warehouses closer to its stores.
The Bottom Line on Target Stock
After the pandemic, Target will look less like Walmart, and more like a hipper Dollar General. Cornell’s strategy has always been to focus on high-quality store brands, with more small stores and an emphasis on online sales.
Analysts and traders always overshoot. Target stock has dropped more from the pandemic than it needed to. It’s now cheaper than Walmart, and much cheaper than Dollar General, which is up 15% on the year.
Dollar General’s success is tied to its location. It’s often the only discount store in low-income and rural neighborhoods. Target’s future is also tied to location, in urban centers and university towns.
Betting on Target stock to keep performing after the coronavirus passes seems a good bet.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in DG.
