On Target in Retail

08/14/2017 2:56 am EST

Focus: CONSUMER

Ben Reynolds

Editor, Sure Dividends

Target (TGT) is a well-known U.S. retail giant with headquarters in Minneapolis. Founded in 1902, the company operates approximately 1,807 stores with a supply chain of 38 distribution centers, says Ben Reynolds, editor of Sure Dividend.


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Target has given 5% of profits to charity since 1946, a practice that amounts to millions of dollars per week. Target made headlines in July when it published a press release (7/13/17) updating its second quarter financial guidance.

Among competitive pressure from Amazon (AMZN) and other e-tailers, Target now expects a ‘modest’ increase in second quarter comparable sales, and both GAAP and adjusted earnings-per-share above the peak of its previous $0.95-$1.15 guidance band.

The update was driven by improved traffic and sales trends. Unsurprisingly, Target shares popped by ~4% following the announcement.

Given this updated guidance, it is possible that the coming quarter represents an inflection point for Target. The company has been making a number of strategic moves as of late, including the introduction of multiple new brands and a recently announced (6/18/17) home delivery service.

Previously, Target also recorded (5/17/17) a notable first quarter earnings beat. Adjusted earnings-per share of $1.21 were well above management’s guidance of $0.80-$1.00.

If Target’s updated second quarter guidance proves correct (as we expect), this marks the second consecutive quarter that Target’s performance has exceeded management expectations.

The coming month is important for Target. Second quarter earnings are scheduled to be released on August 16th, and we’ll be watching closely for further signs of improved business performance.

Target’s competitive advantage comes from its unique mix of low prices and high-quality stores. Target also has exceptional brand equity – Forbes estimates the Target brand to be worth $7.3 billion.

As a discount retailer, Target is quite recession-resistant. The company saw adjusted EPS decline by 14% peak-to-trough during the worst of the 2007-2009 financial crisis. Earnings rebounded the next year and the company saw a new level of peak per-share profitability two years later.

Target’s future growth will be driven by its transition to a true omni-channel shopping experience. Digital sales contributed just 4.3% to Target’s sales in the last quarter, but have grown at an astounding 28% annual rate, on average, since 2nd Quarter 2014. Continued 20%+ digital sales growth is likely.

Despite Target’s compelling online growth runway, the company is trading at a rock-bottom valuation – approximately 13x 2017’s expected earnings-per-share.

2017 earnings expectations of $4.35 and Target’s long-term average price-to-earnings ratio of 15.3 implies a fair value of $66, a roughly 14% premium to currrent prices.

Investors should also note that Target’s dividend yield of 4.3% is near an all-time high, adequately compensating the patient investor that waits for eventual price appreciation.

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