Target Corporation (TGT) is a brick-and-mortar retailer in the United States. Target sells a wide range of items including food, clothing, furniture, office supplies, toys, and most things in between.
I am Bullish on TGT stock. (See Analysts’ Top Stocks on TipRanks)
How to Flourish in Physical Retail
It is no secret that brick-and-mortar retail has suffered due to the rise of ecommerce in the United States, namely Amazon (AMZN). There have been dozens of retails bankruptcies over the past two decades. These include giants like Sears, Radio Shack and Borders. The pandemic also accelerated the trend as Aldo, Pier 1, Lord & Taylor, and J.C. Penney followed suit.
On the other hand, Target has figured out a way to flourish during this time. Over the past 10 years the stock, including dividends, has appreciated over 500% for investors. What’s more, over five years it has returned over 310%. This may be attributed to several factors; however, two stand out.
First, many items the store carries are not ecommerce-friendly. Clothing, furniture, toys, makeup, and other items are things that consumers like to touch, see in person, and try on. Food is another item that most people will want to purchase in person rather than waiting for a shipment. These are key items at Target.
Further, Target has clean stores and admirable customer service. Many retailers tried to cost cut their way out of trouble when Amazon came on the scene. The results were disorganized stores, short-staffing, and a generally poor in-person experience. This, of course, then perpetuated the switch to online shopping and began the death spiral.
Target, on the other hand, has invested in customers relations through its team members. Chances are you know people who shop at Target because they genuinely enjoy the experience. Target has reported $75M in bonuses paid to front-line employees in Q2 2021 and six total bonuses to hundreds of thousands of employees paid out in the last year and a half.
Target also has over 100 million rewards club members. This program is an excellent driver of customer loyalty.
By the Numbers
Turning to the metrics, on a trailing twelve months (TTMs) basis, Target’s top-line revenue has increased more than 33% over the past three years. While other retailers are suffering, Target is gaining. The EBITDA figures are even better, with an increase of over 72% in the last three years on a TTM basis. TTM basis is often the best measurement due to the cyclical nature of retail, mostly due to holidays.
Target has earned $12.56 in diluted earnings per share (EPS) over the last four quarters and trades at a reasonable forward price-to-earnings (PE) ratio of just over 19x. It should be noted that this is higher than historical PE ratios for Target.
The company also provides a dividend, with the current yield around 1.20%. In addition, the company has a robust share buyback program. This is a tax-deferred return of capital to shareholders. Share buybacks also support the stock price, as they provide a base level of demand.
Over the previous 12 months the company has repurchased $2.89B in shares. This amounts to over 2.4% of the current market cap – a significant investment in shareholder value.
Forward Thinking
Target is also not resting on its laurels. It is offering several initiatives to spur growth and keep existing customers whose needs and options are evolving. The company’s digital sales soared during 2020 ,which came as no surprise. What is slightly surprising is that the digital sales in Q2 2021 were actually 10% higher than in Q2 2020. Target is also offering popular drive-up services.
Target partners with other like minded brands. One such brand is Ulta Beauty (ULTA). Ulta is similar to Target in that customer services is a key factor and the products are best tried in person, rather than ordered online. Partnerships like this drive store traffic and, in turn, increase revenues.
Target’s Website Traffic
According to TipRanks’ Website Traffic Tool, quarter-to-date visits to Target’s websites are down 16.72% from the same period last year. At the same time, its stock price has risen since then.
Summary on Target
Target’s current share price of $245 is a marked increase of 49% over the past year. September retail sales were also positive, heading into the holidays. Target is making the right moves to remain a retail staple with the addition of partnerships, digital, drive up services, and 100M members. Many investors avoid physical retail; however, if one wishes to gain exposure to this sector, Target is a compelling pick.
Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.
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