Does Target’s Stock Have More Upside?

Despite an almost 23% rise since the beginning of this year, at the current price of around $158 per share (as of November 10th), we believe Target’s stock (NYSE: TGT) still has more to go. The big-box retailer has benefited from the shift to e-commerce due to its longtime omnichannel approach and witnessed a strong 18% growth in revenues so far this year. Target has shown that its brick-and-mortar stores have a place in the future of retail, and it’s leveraging that position to add more convenient online alternatives. The retailer invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt, all this while leveraging its brick-and-mortar stores – resulting in a stellar 273% growth in same-day services in Q2. That said, the news of Pfizer’s vaccine showing positive results should not impact Target’s near term outlook, as it is able to strike a balance between physical and digital sales.

Target’s stock is already about 140% higher than it was at the end of 2017. Our dashboard, What Factors Drove 142% Change in Target’s Stock Between 2017 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of this growth over the last 2 years is justified by the roughly 7% increase in Target’s revenues from $72.7 billion in 2017 to $78.1 billion in 2019. In addition, earnings growth, on a per-share basis, was higher by 21%. This was driven by a 20 bps net margins expansion from 4.0% to 4.2% and a 7% decline in shares outstanding during this period.

Finally, Target’s P/E ratio increased from about 12x at the end of 2017 to 20x at the end of 2019. While the company’s P/E is now around 25x, it could expand modestly as the demand for groceries remains high in the near term.

So how has Coronavirus impacted the stock?

Target saw a worried public stocking up on food and essentials like medicine and cleaning supplies during the lockdown period. The retailer also saw a boost in products related to in-home activities, such as home office and entertainment needs. Consequently, Target’s total revenue rose 18% year-over-year in the first half of this year, and its diluted EPS jumped 17% during the same period. This is despite higher fulfillment and safety expenses reducing its operating margin by 30 basis points to 6.6%. In Q1, its total comparable sales jumped 10.8% and its digital comps grew 141%. For Q2, its total comps rose 24.3% as its digital comps surged 195%. Around 90% of digital orders were fulfilled in stores in the second quarter, providing a cost-effective approach to e-commerce that allows the company to make a profit from strong ordering.

Target has been able to adapt to a new normal and could thrive going forward – given that people are getting back to work and the economy is starting to pick up again. The retailer is stepping up its offering by making fresh and frozen groceries available through Order Pickup and Drive Up. In addition, as shoppers return to their usual buying habits, there could be a surge in Target’s sales in apparel and other higher-margin discretionary categories as well. Target’s discounted prices and private-label brands (that differentiate it from Amazon) are a big draw for customers.

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