We focus on buying undervalued stocks and holding them for 3 to 5 years in order to reach their full potential, explains Chris Quigley, value investing expert and contributing editor at The Prudent Speculator.
General merchandise discount store chain Target (TGT) posted earnings per share of $1.53, versus the $1.44 estimate, in fiscal Q1 2020. TGT had sales of $17.6 billion, versus the $17.4 billion estimate.
The shares have risen more than 10% since the release, as investors cheered better-than-expected comparable sales growth (4.8% vs. 4.3%), better-than-expected fiscal Q2 EPS estimates ($1.61+/- $0.10 vs. $1.60) and 4.3% transaction growth.
In fiscal 2020, TGT reaffirmed expectations for EPS between $5.75 and $6.05 per share (compared with $5.39 in 2019). We think that Target’s evolution has been rewarding both for customers and shareholders and believe the company’s delivery options rival (or exceed) the choices offered by competitors.
The stock scores highly in our proprietary scoring system and we think the business’ future looks bright. Our target price for Target, which trades for 13.4 times next 12-month earnings and yields 3.1%, has been raised to $98.
Shares of Foot Locker (FL) plummeted almost 16% after the specialty retailer reported fiscal Q1 2020 results that came in below consensus analyst expectations. Investors seemed upset about the company’s same-store-sales growth of “only” 4.6%, even as management indicated that it saw the full-year comparison on track.
The modest transgressions notwithstanding, we saw the one-day whack to FL shares as very much overdone, especially as the stock had already skidded more than 7% in May prior to Friday’s plunge.
Foot Locker sports $1.13 billion of cash on its balance sheet and only $123 million of debt. Net cash per share now registers at $8.93, providing plenty of resources to right-size and grow the business. That in mind, during the first quarter, Foot Locker opened 14 new stores, remodeled or relocated 13 stores, and closed 34 stores.
As of May 4, FL operated 3,201 stores in 27 countries in North America, Europe, Asia, Australia, and New Zealand. In addition, 119 franchised Foot Locker stores were operating in the Middle East, as well as 10 franchised Runners Point stores in Germany.
We still see Foot Locker offering desirable upside to patient long-term investors. We continue to like the company’s solid cash position and solid execution, though we did nudge our target price lower to $82 for the stock.
Of course, with a big stock buyback program, the share price discount allows management to repurchase far more shares than initially expected, making our long-term holdings more valuable. FL trades for less than 9 times next 12-months adjusted EPS expectations and yields 3.4%.
After a five-quarter streak of beating bottom-line consensus analyst expectations, family oriented department store operator Kohl’s (KSS) disappointed investors by posting adjusted earnings per share of $0.61, versus the $0.68 estimate, for fiscal Q1 2020. Kohl’s top-line was also below expectations ($3.82 billion versus $3.93 billion).
We believe that Kohl’s was aggressive in marketing spend during the quarter to try to improve slow foot-traffic as competition discounted heavily to get rid of post-holiday inventory. A few bright spots in the quarter were athletic apparel and digital sales, in which the company realized high-single-digit growth.
Investors sold shares not just on the quarterly shortfall, but also because management announced that it was reducing its full-year adjusted EPS expectations from a range of $5.80 to $6.15, to a range of $5.15 to $5.45. No doubt, the news was not grand, but the stock was taken out to the woodshed, with the shares sinking nearly 20% last week alone.
Despite the short-term setback and the potential near-term headwinds blown by the ongoing trade skirmish with China, we continue to like Kohl’s evolution and believe there is plenty of upside in the name, especially after what we feel was a very overdone selloff. Our target price has been cut to $85, but we note that the stock now trades for 9.5 times estimated earnings while yielding 5.4%.
