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Target's Efforts Propel Stock, Outpaces S&P 500 & Industry

Zacks Equity Research

Target Corporation TGT has been one of the most talked about stocks in Wall Street courtesy of impressive holiday sales number that formed the perfect base for the final quarter amid an ultra-competitive retail environment. This general merchandise retailer commenced the year on an upbeat note, and has sustained the momentum so far.

Shares of this Minneapolis, MN-based company have surged roughly 20.6% compared with the S&P 500’s and the Zacks Retail-Discount industry’s growth of 14.3% and 15.7%, respectively, so far in the year.

Here’s a Short Analysis

Sound Fundamentals

Retail is no more restricted to brick-&-mortar, and the scenario has drastically changed with the advancement of technology and digital transformation which have altered consumer shopping pattern. In fact, Target has taken steps that have improved prospects in a big way. The company’s initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores to generate higher sales productivity bode well.

Robust traffic, favorable store comps and surge in comparable digital sales are clearly aiding results. Comparable sales rose 5.3% during fourth quarter of fiscal 2018 compared with 3.6% growth witnessed in the year-ago period. Comparable digital channel sales surged 31% and added 2.4 percentage points to comparable sales. Management now anticipates comparable sales growth in low-to-mid-single digit in both first quarter and fiscal 2019.

It has also rolled out Target Restock program that enables customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge. Further, in order to improve supply chain and expand delivery capabilities, the company had acquired Grand Junction.

Earlier, Target teamed up with popular online grocery delivery service, Instacart, to capture the booming online grocery delivery market. Further, the company made significant headway in the same-day delivery race by acquiring Internet-based grocery delivery service, Shipt, to provide same-day delivery of more than 55,000 groceries, essentials, home, electronics, toys and other products. Shipt is now operating in more than 1,500 outlets in over 200 markets.

Drive Up, an app-based service, is another initiative to facilitate the shopping process. The service enables customers to place orders utilizing the Target app and have them delivered to their cars. The company offers the service across approximately 1,000 stores.

 




Valuation Perspective

A brief glance at some valuation metrics seems to indicate that this Zacks Rank #2 (Buy) company has enough room to run in bourses. Further, a Value Score of A also indicates the same.

Target with a price to sales ratio of 0.6 compared with that of industry’s 1.3 indicate that the stock has enough upside potential. The stock also looks attractive with respect to a forward price-to-earnings (P/E) multiple of 13.7x versus industry’s 20.9x. A more-or-less similar picture emerges when comparing EV/EBITDA ratios. Target holds the edge here with an EV/EBITDA ratio of 7.9 lower than 16.2 for the industry.

Bottom Line

Target is deploying resources to enhance omni-channel capacities, coming up with new brands, remodeling or refurbishing stores, and expanding same-day delivery options. Target has undertaken rationalization of supply chain with same-day delivery of in-store purchases along with technology and process improvements.

Management now projects fiscal 2019 adjusted earnings in the band of $5.75-$6.05 per share, up from $5.39 reported in fiscal 2018. For the first quarter, adjusted earnings are envisioned to be between $1.32 and $1.52.

3 More Hot Picks

Costco COST delivered average positive earnings surprise of 5.5% in the trailing four quarters. It carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kohl's Corporation KSS has a long-term earnings growth rate of 7.2% and a Zacks Rank #2.

Casey's General Stores CASY has a long-term earnings growth rate of 10% and a Zacks Rank #2.

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