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Customers are Loving Target’s Pick-Up/Delivery Options

Stock (Symbol)

Target (TGT)

Stock Price

$224

Sector
Food & Necessities
Data is as of
December 17, 2021
Expected to Report
February 28
Company Description
Target Corporation is a general merchandise retailer selling products through its stores and digital channels. Its general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items. Its digital channels include a range of general merchandise, including a range of items found in its stores, along with an assortment, such as additional sizes and colors sold only online. Its owned brands include Archer Farms, Market Pantry, Sutton & Dodge, Art Class, Merona, Threshold, Ava & Viv, Pillowfort, Room Essentials, Wine Cube, Cat & Jack, Simply Balanced and Wondershop. Its exclusive brands include C9 by Champion, Hand Made Modern, Mossimo, DENIZEN from Levi’s, Nate Berkus for Target, Fieldcrest, Kid Made Modern, Genuine Kids from OshKosh and Liz Lange for Target. As of January 28, 2017, the Company had 1,802 stores across the United States, including 1,535 owned stores, 107 leased stores and 160 owned buildings on leased land. Source: Refinitive
Sharek’s Take
David SharekTarget’s (TGT) same-day pickup and delivery has become a new catalyst for company growth. Last quarter, Target’s digital sales, which represent about 18% of TGT’s total sales, grew 29%. Within digital sales, same-day services represent the backbone of this growth as they grew almost 60%. Same-day services include curbside pickup, Drive Up, Order Pickup and the home delivery service Shipt. Within same-day services, Drive Up grew 80% last qtr and has expanded more than 10x since 2019. Also, in-store Pickup and Shipt grew more than 30% during the qtr. Overall, Target’s profits grew 9% last qtr as sales increased 13%.

Target is the second largest general merchandise retailer in America, with 1,909 stores. 75% of the U.S. population lives within 10 miles of a Target location. Guests have a median age of 40 with an approximate household income of $64,000 a year. Around 43% of guests have a child at home, and around 57% have completed college. Target stores are getting a fresh-new look, and shoppers are impressed. During 2017 and 2018 the company remodeled more than 400 stores. It completed 300 remodels in 2019 and an additional 132 stores during 2020. Delivery is getting faster with 4 new regional distribution centers planned by the end of 2022, and 6 sortation centers planned for this year. Retail sales are the vast majority of company revenue, but Target also earns revenue from credit card profit-sharing from TD Bank. Last qtr, Target’s top five merchandising categories grew sales at double-digit rates. Performance was led by baby care, pets, over-the-counter health care, snacks, candy, as well as toys and sporting goods. Seasonal occasions like Halloween and back-to-school also boosted sales. Here’s a breakdown of sales by category last quarter:

  • Beauty and Household Essentials: 28% of total sales with 14% sales growth year-over-year.
  • Food & Beverage: 20% of sales with 15% growth.
  • Apparel and Accessories: 17% of company sales, 11% growth.
  • Home Furnishings & Decor: 20% of Target sales with 11% growth.
  • Hardlines: 15% of company sales, with 14% growth.

TGT’s new smaller format stores and added pick-up/delivery options have pushed up the company’s growth rate. The fact that same-day services sales grew almost 60% shows the company has become more flexible within its channels. Management’s long-term expectations were for mid single-digit sales growth and high-single-digit profit growth or better, and its surpassing these goals. Analysts give the stock an Estimated Long-Term Growth Rate of 15%, and the shares yield an additional 2%. Also, management has increased the dividend every year since 1971 and buys back stock as well. Shares outstanding have decreased 21% since 2021 (source: Factset). TGT is one of the top holdings in the Conservative Growth Portfolio. With a P/E of 17 this stock is a bargain. 

One Year Chart
TGT’s one-year chart looks bad. The stock is in a downtrend. But, with a P/E of just 17 I don’t think the stock will go much lower.

The Est. LTG of 15% is up from 13% last qtr. I’d LOVE it if TGT could grow profits 15% a year the next 3-5 years. If that were to occur, I think the stock would be worthy of a P/E of around 25-28.

Target got a lot of extra business during COVID-19 lockdowns. For the past two qtrs, profit growth has bee below average because the company was lapping exceptional results from the year-ago periods. Note, profit growth was high three and four qtrs ago, thus comparisons will be tough next qtr and the qtr after.

Earnings Table
Last qtr, Target posted 9% profit growth and beat estimates of 1%. Revenue increased 13%. Same-store sales increased 10% while digital sales grew 29%. Digital sales were fueled by 60% growth in same-day services (Order Pickup, Drive Up, and Shipt). Traffic increased 13%, over last year. More than 95% of the company’s sales during the qtr were fulfilled by company stores. All five merchandise segments delivered positive double-digit performance.

Sales performance, was led by strong consumer trip frequency and basket growth in Essentials, Beauty, and Food & Beverage categories and strength in same-day digital fulfillment services as well as continued strong double digit growth in all merchandise businesses. During the earnings call, management also mentioned that the company is being negatively affected by rising prices and supply chain disruptions. However, TGT is embracing some of these higher costs, rather than passing them on to clients as a long-term investment strategy with the goal of deepening TGT’s guests’ engagement with the company.

Annual Profit Estimates increased across the board this qtr.

Qtrly Profit Estimates are 7%, -19%, 0%, and 12% growth the next 4 qtrs. Notice profit growth was only 8% 2QtrsAgo. That should mean easy comparisons 3QtrsOut. Right now, 0% profit growth is expected that qtr, but I feel 15% is possible.

Fair Value
Around 4-8 years ago, TGT stock used to have a P/E of around 15 because profits weren’t growing. And I mean they really weren’t growing.

Then in 2019, profit growth starting climbing at a faster rate and the company was deserving of a higher multiple, so in a four qtr span from 2019 to 2020 the P/E went from 16 to 18, then 19 and 24.

Now the P/E is 17, but I think it should be 26. The stock has 56% upside to my 2022 Fair Value of $348.

Bottom Line
Target (TGT) put in a long base earlier in the decade, as profit growth was flat. Then in 2019 the stock broke out and ran to new All-Time highs. But the P/E was still in the mid-teens. The recent surge higher is a combination of a rising P/E combined with higher profits. Not shown here is TGT was a HUGE winner from 1995 to 2007 as the stock went from around $6 to around $60

This new-and-improved Target is executing beautifully. But its hard to tell that now because profits were exceptional a year-ago and the company is now dealing with tough comparisons. I expect 15%-or-so profit growth to return by Summer 2022.

TGT stays at 3rd in the Conservative Growth Portfolio Power Rankings. I will add the stock back into the Growth Portfolio as the upside is exceptional. TGT will rank 8th in this Power Rankings.

Power Rankings
Growth Stock Portfolio

8 of 33

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

2 of 37

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