Target (NYSE:TGT) has long been my favorite retail stock. In 2018 I defended Target stock after an earnings miss. I pounded the table for it in 2019. I called it a cheap stock early in the pandemic.
Investors who have stayed with the company since Brian Cornell became CEO in 2014 have been rewarded. Its strategy of premium house brands, and of clean stores in urban settings, has paid off.
But now that it has caught up to Walmart (NYSE:WMT), and differentiated itself, where can Target find growth? If you’re buying the stock now, growth is what you’re betting on. Now trading at nearly $155 per share, Target’s market cap is $77.5 billion.
That’s about the same level as its annual sales. That’s a danger sign.
Buy Retail at Wholesale
While tech companies sell for many times their annual sales, retailers almost always sell at a discount.
Walmart is currently worth $413 billion on estimated sales of $530 billion. Most retailers sell at about half their annual sales, because margins are thin and growth rates often limited.
Target is a retailer. It’s a great retailer, and investors have rewarded it. The 68 cent-per-share dividend that once looked rich is now yielding just 1.7%. You’re paying almost 24x earnings for growth in the high single digits.
Then there’s the location strategy. Target has deliberately chosen to build small stores near urban centers. Those locations are less popular during the pandemic. Two stores in Target’s hometown of Minneapolis were looted during this year’s riots. America is looking more like a Walmart country today or, at least, a Costco Wholesale (NASDAQ:COST) country.
Finally, there are labor troubles. Workers at Shipt, a delivery service it created in Alabama staffed by gig workers, aren’t getting the raises employees are getting. Many say new pay algorithms cut their pay. Some have gone on strike.
This may not be a problem now, but as labor conditions tighten it will be.
Why Buy Target Stock Now?
There are still reasons to like Target, starting with CEO Cornell.
When it comes to stocks, I tend to bet the jockey rather than the horse. Cornell is a good jockey. You can tell because other retailers have been hiring away his executives, most notably Mark Tritton, now CEO of Bed, Bath Beyond (NASDAQ:BBBY).
As enclosed shopping malls and the stores that inhabited them, continue to die away, Target will pick up market share. Half the company’s former department store rivals may be gone by next year.
Cornell saw this happening years ago. Target was once known as a discounter, but the discount price is now the retail price. Target maintains margins with high-quality store brands that lure shoppers the way the old models’ name brands did.
Cornell is also continuing to innovate. He’s instituting store reservations to reduce crowding during the Christmas rush. The company’s app now offers contactless self-checkout anywhere in the store. Parking for drive-up services is being doubled, as are the number of employees serving such shoppers.
Instead of having a big Black Friday blowout after Thanksgiving, Target is doing weekly sales through November. Just as Election Day got pushed into October, so Christmas is now in November at Target.
The Bottom Line
Target is fully valued right now.
It can still show faster growth than Walmart because it remains less than one-sixth Walmart’s size. It should continue to grow its top line, and its bottom line, this Christmas.
But shares are due for a breather. This is no longer a discount store. It’s what Macy’s (NYSE:M) was. The discount price is now the full price.
Wait for it to go on sale.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
