Despite losing two stores in its hometown during the riots over George Floyd’s death, Target (NYSE:TGT) scored record earnings for the quarter ending his month. This lead to a huge short-term gain for Target stock.
Net income of $1.69 billion, $3.38 per share, on revenue of nearly $23 billion sent shares up 13% in just one day. Target opened Aug. 20 at $155.50, with a market cap of over $77 billion, and a price-to-earnings ratio of 28.5x.
The question for investors who missed the move (I pounded the table for Target as recently as April) is whether the move was overdone. Target stock is now well ahead of fundamentals, the market cap now nearly equal to last year’s sales of $78 billion.
The Bull Case for Target Stock
TV analyst Jim Cramer said it’s not too late to buy. He said the company is well-positioned for a great Christmas season, and that e-commerce results were “extraordinary.”
Curbside pick-ups rose 700% since they’re safe under pandemic conditions. Digital deliveries through the company’s Shipt service tripled. Overall sales were up 24%, and profits rose 80%, more than doubling analyst estimates.
Target’s store brands have been the secret sauce of CEO Brian Cornell’s reinvention of the company. The intent is to match or exceed the quality of name-brand merchandise. Each brand has a unique identity like Opal House, Archer Farms or Good and Gather.
Target’s move into food, which accelerated a decade ago under former CEO Gregg Steinhafel, made Target an essential business under lockdown. Essential big box retailers like Target and Walmart (NYSE:WMT) were able to widen their apparel leads over stores like Kohl’s (NYSE:KSS), which were forced to close.
Target’s gains were also bigger than Walmart’s in percentage terms because Walmart is six times bigger. Target’s year-over-year sales gain was $4.5 billion, while Walmart’s was $7.4 billion.
Can This Last?
The pandemic won’t last forever. When we can go where we want, will we still limit our choices to just buy what we need?
Target stock is now up 20% on the year, and up 60% from its novel coronavirus lows. That has helped after a miss on earnings over Christmas, the last pre-pandemic quarter, when soft toys just didn’t sell. Target’s strategy of putting stores in urban cores, a contrast with Walmart, also took a hit during the protests, when three central Minneapolis outlets were looted.
Even Cornell admits the last quarter was an outlier. He declined to offer an outlook for the rest of the year, saying “back to school” sales might be light, with two-thirds of students starting the year remotely. Even Christmas is uncertain as the pandemic continues to rage.
Then there’s that valuation. Retailers usually sell for about half their revenue, and Target is now near 100%. Retailers are usually bought as dividend stocks, and Target’s yield is now down to 1.75%. That compares well to government bonds yielding less than 1%. But when bond rates go up, paying 28 times earnings for a chain store may no longer be fashionable.
The Bottom Line
I have been recommending Target’s stock for several years. I like the stores and I like the strategy.
But this looks like a good time to take profits. Today’s valuation, relative to the market, won’t be sustained. Tastes, which are all going Target’s way right now, are fickle. Problems, like the riots which kept the stock price down before results, remain.
This doesn’t make Target a bad stock or a bad company. But you shouldn’t fall in love with what you own. Lighten up on your winners and look for opportunity in solid companies where analysts are screaming sell. Lead the crowd, don’t just follow it. Bed Bath, & Beyond (NASDAQ:BBBY) is led by a former Target executive, Mark Tritton. Kohl’s (NYSE:KSS) is pretty beaten down, but looks like a survivor.
Dana Blankenhorn has been a financial 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 no shares in companies mentioned in this story.