Target Corporation (TGT) was well-positioned in 2020 to benefit from the pandemic, thanks to its digital sales channel. Target operates as a general merchandise retailer in the United States that operates approximately 1,897 stores.
Although the company has seen strong growth in the past year, it’s likely to return to single-digit growth, going forward. As a result, we remain neutral on the stock. (See Target stock charts on TipRanks)
Growth Catalysts
Target operates in the retail industry, which is expected to grow at a CAGR of 4.5% from 2021 to 2026. This does not sound exciting, but, it demonstrates that the industry is still healthy and viable.
The overall industry is in the midst of a shakeup, with many companies going live on the internet. Thus, e-commerce is the fastest-growing segment of retail. This is driven primarily by the increased use of smartphones. In addition, the added convenience of shopping from home has contributed to the rise of e-commerce.
Fortunately, Target appears to be successfully executing its digital strategy. The company grew online sales by 10% in Q2 of 2021, after seeing very strong growth of 195% in Q2 of 2020. A main growth driver of these online sales are the company’s same-day services.
Fulfillment speed is crucial for a successful e-commerce strategy; customers don’t want to wait a long time for their orders to arrive. This is clearly indicated when looking at the growth of these same-day services. In Q2 of 2021, the growth was 55%, on top of 270% growth in Q2 2020.
The result of Target’s successful digital integration is that it has a 2.2% market share of total e-commerce sales. Although this doesn’t seem like much, we need to consider that the retail industry is very fragmented and that 2.2% actually places Target in fifth place (tied with Best Buy (BBY) and Home Depot (HD)) for overall market share. This is ahead of both Kroger (KR) and Costco (COST).
Measuring Efficiency
Target needs to hold onto a lot of inventory in order to keep the business running. Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting success. To measure TGT’s efficiency, we will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:
CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Target’s cash conversion cycle is -8 days, meaning the company converts inventory into cash before having to pay suppliers. Basically, Target doesn’t have to put up any money to finance inventory purchases because it can move its inventory and collect the payments while still on credit. Thus, Target’s suppliers are essentially financing its operations.
Wall Street’s Take
Turning to Wall Street, Target has a Moderate Buy consensus rating, based on 14 Buys and four Holds assigned in the past three months. The average Target price target of $284.29 implies 24.5% upside potential.
Final Thoughts
Although Target has seen strong tailwinds from its online segment, future growth is expected to only be in the mid-to-low single digits. As a result, we believe there may be better opportunities elsewhere.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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