A leading value-oriented money manager, John Buckingham has also been the editor of The Prudent Speculator for over three decades. Here, he looks at a trio of big box stores in the discount retailing space.
General merchandise discount store chain Target (TGT) announced that it earned $2.67 in Q4 (a company record) (vs. the $2.49 estimate) as sales grew 20.5% to $28 billion.
The size of the average ticket jumped 13.1% while same-day and digital sales respectively grew 212% and 118% year-over-year. Despite the strong results, shares slid 6% over the past week as sales growth decelerated for a second straight quarter, after many raced to stock their homes and pantries with essential items in Q2 of 2020.
We appreciate how Target’s investments in recent years allow the company to use its proximity, with nearly 1,900 stores within 10 miles of the vast majority of U.S. consumers, to elevate the convenience it is able to offer.
While we don’t expect the top-line growth experienced throughout the pandemic to persist, we like Target’s position to benefit from discretionary purchases as the economy continues to open.
Management has resumed share repurchase activity, while it anticipates another dividend increase later this year. For now, the yield is 1.6% and our target price stands at $219.
Department store chain Kohl’s (KSS) announced earned $2.22 in Q4 on $5.9 billion of sales. The bottom-line result was vastly better than the $0.98 analysts had expected, while sales were roughly in line. Strong cost management contributed to an 8% decrease in SG&A expense, while digital sales grew 22% year-over-year (now accounting for 42% of the total).
Management credited at least 2 million new unique customers (a third of which are Millennials) shopping at Kohl’s as a result of the Amazon Returns program, and the company expects to launch Sephora in August (200 stores within a store are expected this year, with 850 by 2023).
Working capital management continues to improve as inventory declined 27% versus Q4 of 2019 and inventory turnover reached a 10-year high. The firm boosted its cash position to $2.2 billion at quarter end, compared to $723 million a year ago.
The company will be resuming its capital allocation strategy in 2021, which includes increasing capital expenditures, reinstating the dividend ($0.25 per share per quarter), resuming share repurchases of $200 million to $300 million, and employing liability management strategies.
Management now expects sales to increase in the mid-teens percentage range with EPS in the range of $2.45 to $2.95 for all of 2021.
We are delighted to see the retailer return to EPS growth in the quarter, and think management is moving in a solid direction to improve inventory, grow the digital channel, control costs and strike contracts with solid brands like Sephora and Calvin Klein.
We continue to like that KSS boasts one of the strongest balance sheets of its peer group and look forward to once again collecting a dividend.
In view of the recent agitation from a group of activist shareholders, our thinking is that management is doing a fine job and we believe the latest numbers, outlook and commentary illustrate the point. We’ve lifted our target price for KSS to $65.
Discount retailer Big Lots (BIG) announced sales and earnings for fiscal Q4 that were mostly in-line with analyst expectations (after adjusting for recently issued guidance by management), with EPS of $2.59 as comparable sales for the period increased 7.9% to $1.7 billion.
Full-year results were the strongest ever, with comparable sales growth of 16.1% and $7.35 per share in adjusted earnings. Home spending trends remained strong as multiple bedding-related products experienced double-digit growth, while furniture spending rose 15% in the period.
BIG remains inexpensive at 10.9 times earnings expected for 2021, despite rallying over 19% since our last commentary in January. As such, we like that management repurchased 1.6 million shares during Q4 at an average cost per share of $46.38.
A hefty $327 million (the total market capitalization is just $2.3 billion) remains on the buyback as of the end of the quarter under its previously announced $500 million share repurchase authorization. The dividend yield is now 1.9% and our target price has been nudged upward to $80.
