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Buy Target (TGT) Stock Before Earnings as a Bet on the Future of Retail?

Benjamin Rains
·4 min read

Jeff Bezos and Amazon AMZN have slowly steamrolled many traditional retailers and small businesses. But the other big players planned and invested in the future and are more than ready to compete against the Seattle giant. In fact,Target TGT, which is set to release its Q3 financial results on November 18, is neck and neck with AMZN stock over the last several years.

Prepared for What’s Next

Target’s expanding portfolio of same-day e-commerce offerings includes in-store pickup, Drive Up, and its subscription-style Shipt unit. These various options have proven vital during the coronavirus economy and will become more integral going forward. For reference, TGT’s Q1 sales jumped over 11%, with Q2 up a whopping 25%.

More specifically, Target’s comps soared by a record 24% last quarter, with digital comps up 195%, and same-day services up 273%. Plus, the retailer posted one of its strongest quarters of in-store comparable store sales expansion on record, up roughly 11%.

The ability to grow both its in-store and e-commerce segments is a great sign because brick-and-mortar retail is alive and well, at least for some. E-commerce accounted for 16% of total U.S. retail sales in Q2, up from 11% in Q2 FY19. Yet some might have thought this figure would be far higher in general, and even more so given social distancing mandates.

 

 

 

 

 

 

 

 

 

Other Fundamentals

Target’s ability to cultivate a strong brand and attract younger customers bodes well and stands in contrast to the likes of Macy’s M and others. The company has multiple lines of trendy, yet affordable furniture, home décor, fashion, and more. And while foot traffic fades in department stores and malls around the U.S., brands such as Levi Strauss LEVI are turning to TGT for exposure.

Meanwhile, its flagship grocery brand, Good & Gather, has built strong momentum since its launch in September 2019. The company is also exposed to the consumer electronics market, though not as much as Best Buy BBY.

Despite its outperformance of AMZN and WMT over the last two years, TGT trades at a discount against both. Target currently trades at 21X forward 12-month earnings vs. Walmart’s 26.4X and Amazon’s 71.9X. The company’s operating margin comes in above its peers and it popped from 7% in Q2 FY19 to 10% last quarter, which is a sign of strength and strong management.

Target raised its dividend over the summer and its 1.67% yield tops Walmart’s 1.45% and roughly matches the 30-year U.S. Treasury. TGT stock also currently holds a “B” grade for Value and an “A” Growth in our Style Scores system.

With this in mind, Zacks estimates call for TGT’s adjusted Q3 earnings to jump over 16% on 11.5% stronger sales. This marks a slowdown from Q2 but would match Q1 and still mark strong improvement compared to pre-virus periods. Peeking further ahead, its fourth quarter sales are projected to pop 6.4%, which would stack up well against all of Target’s best pre-pandemic quarters over the last several years.    

 

 

 

 

 

 

 

 

 

 

 

 

 

Bottom Line

Overall, Target’s adjusted fiscal 2020 EPS figure is expected to climb over 13.3% on 13% higher revenue. And Target’s longer-term earnings outlook has improved to help it land a Zacks Rank #2 (Buy) heading into its Q3 release on Wednesday, Nov. 18.

The company crushed our bottom-line estimate by over 100% last quarter, as part of a longer stretch of big beats. Even though it might be hard to continue to impress Wall Street in the near-term and there might be some post-earnings selling pressure if people take profits, let’s remember that the company is prepared to remain a major player in big retail, which is only becoming more popular as small businesses struggle to compete.

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Target Corporation (TGT) : Free Stock Analysis Report
 
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Macys, Inc. (M) : Free Stock Analysis Report
 
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