Big box retailer Target (NYSE:TGT) easily represents one of the surprising bulls of the year so far. Since January’s opening price, Target stock has gained slightly over 38%. It’s a similar story with Walmart (NYSE:WMT), which is up 20% year-to-date.
However, the trajectory for TGT stock has been anything but linear, and that’s also no surprise. Escalating tensions between the U.S. and China — and the resultant trade war — have clouded prospects for the broader retail segment. For instance, the benchmark exchange-traded fund SPDR S&P Retail ETF (NYSEARCA:XRT) is up less than 4% YTD.
Moreover, last month, TGT absorbed significant volatility before streaking forward to its current lofty place. Naturally, the question on most investors’ minds is where will Target stock head next?
As with most tradable assets in this current environment, it’s a tricky answer.
Employee Benefits and Planned Raises Bring Questions for Target Stock
Just recently, TGT management dropped what I considered to be a bombshell: Target employees will receive expanded paid family leave and childcare benefits, as well as better elderly care options. This potentially impacts hundreds of thousands of workers across the U.S.
That’s because Target’s plan is very comprehensive. It includes both hourly and salaried positions, which cover both part-time and full-time employees.
Better yet, for those looking to wear those red vests, Target currently offers a baseline salary of $13 per hour. Management intends to drive that up to $15 by the end of 2020.
On one hand, the big-box retailer should be commended for taking a leadership role in holistic employee compensation. Even Ivanka Trump, who probably isn’t the most popular person right now, champions child-care benefits. But what does that mean for TGT stock?
This is where the fluff hits the smelly stuff. While it’s great to advocate “feel good” causes, someone has to pay for them. In this case, it’s the stakeholders of Target stock.
And I’m not sure if they’ll really want to go for extending these benefits, despite the obvious PR victory. Here’s the reality: over the past few years, net margins have been flat to declining. Only now are they starting to pick that back up. But that data came before the trade war mess.
Take aside the trade war for a minute. As a big-box retailer, margins are usually tight. Because Target has moved into low-margin segments like groceries, this metric is even more significant for TGT stock. Significantly enhancing the scope of benefits and salaries isn’t what you want to see as an investor.
Curious Decision Could Erode Enthusiasm for TGT Stock
Of course, valid arguments exist for raising employee salaries and other benefits. Among them, stress mitigation is a huge one.
Both mentally and physically, most American workers are stressed out. They have demanding jobs in demanding industries. For those with families, the real work begins after they’ve clocked out of the office. Thus, the theory goes that if you de-stress your workers, you’ll increase their productivity, which in turn benefits the business.
Naturally, the best ways to de-stress your workers is through pay raises or financially meaningful benefits. And that’s the narrative TGT management would push if you’re considering Target stock. Moreover, the labor market has tightened considerably over the years. Simply put, retailers are fighting for the best talent.
I understand these arguments. However, I don’t find them compelling for Target stock. Primarily, this is because most Target jobs are transient by default: you are not supposed to make a career out of pushing boxes around.
Therefore, I question whether the pros outweigh the cons here for TGT stock. Sure, it’s great to provide raises and additional benefits. But even at $15 per hour, that pay is nowhere near enough in most metropolitan areas to survive independently.
What I’m saying is that eventually, most Target workers will leave to greener pastures anyways. Therefore, it’s better to save the margins for those who own Target stock. Those are the folks you don’t want leaving.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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