Selling returned to the market in a big way recently, with the Nasdaq down 10% off its September 2 highs. Tech stocks and coronavirus standouts such as Tesla TSLA and Apple AAPL have been sold as Wall Street takes profits and takes a breather.
The correction seems healthy given the market’s massive run that heated up again in August. Yet the uncertainty of the upcoming election and the spike in options trading could create more volatility in the near-term. Nonetheless, investors might want to stay on the hunt for strong stocks to boost their portfolios, especially with interest rates pinned near zero for the foreseeable future.
Prepared for the Pandemic…
Target TGT, like Walmart WMT and nearly every other retailer, has boosted its e-commerce and direct-to-consumer business. Amazon’s AMZN success and expansion plans helped spur the digital commerce push in retail, which prepared many to shine during the coronavirus conditions.
Target’s expanding portfolio of same-day offerings includes in-store pickup, Drive Up, and its subscription-style Shipt unit. These various options have proven vital during the pandemic, with its Q1 sales up 11.3%. The Minneapolis-based retailer then posted 25% sales growth in the second quarter.
Target’s Q2 comps also soared by a company-record 24.3%, with digital comps up 195%, and same-day services up 273%. Plus, TGT posted one of its strongest quarters of in-store comparable store sales on record, up 10.9%. Investors should also note that its operating margin climbed from 7% in Q2 FY19 to 10%, which comes in well above Walmart and Amazon.
The ability to grow both its in-store and e-commerce segment is a great sign because brick-and-mortar retail is hardly dead. In fact, e-commerce accounted for 16.1% of total U.S. retail sales in the second quarter, according to the U.S. Census Bureau. This figure was up significantly from Q1’s 11.8% and the year-ago period’s 10.8%. Yet, many might have expected for e-commerce to be even more popular given the conditions.
More broadly, Target has been able to keep and attract younger consumers, unlike department stores, through trendy lines and affordable furniture, home décor, and fashion. On top of that, its flagship grocery brand, Good & Gather, has built strong momentum since its launch in September 2019.
Target stock is up 15% in 2020 and 25% in the last three months. This is part of a much larger climb that’s seen it outpace WMT over the last three years. Investors should also note that Target hasn’t been impacted by the recent selloff, with its shares down only slightly from its August highs.
Despite the climb, Target trades at a discount, as it has for years, to its industry and its peer group—which includes Costco COST, Dollar General DG, and others—at 19.7X forward earnings vs. 25.5X.
On top of all of that, Target in early June raised its quarterly dividend by 3% to $0.68 per share. Target’s 1.84% dividend yield tops Walmart and the S&P 500’s 1.71% average. This yield looks even better considering the current interest rate environment.
Peeking ahead, Zacks estimates call for TGT’s adjusted Q3 earnings to jump 10.3% on 10% stronger sales. Meanwhile, its adjusted fiscal 2020 EPS figure is expected to jump 12% on 12.4% higher revenue. And Target’s longer-term earnings outlook has turned far more positive since its August 19 release, with its FY20 EPS estimate up 44% and FY21 up 15%.
Target’s positive bottom-line trends help it grab a Zacks Rank #1 (Strong Buy) at the moment. TGT also holds an “A” grade for Growth and its Retail - Discount Stores industry rests in the top 30% of our more than 250 Zacks industries.
TGT clearly appears worth considering as a longer-term investment, even if there is some near-term volatility.
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