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Why Target (TGT) Stock is a 'Strong Buy' At New Highs

Target TGT crushed first quarter estimates on May 19 and provided upbeat guidance during a busy week for retail earnings that featured fellow heavyweights Home Depot HD, Lowe’s LOW, and Walmart WMT. TGT stock has surged to new highs since its report as Wall Street continues to dive into the big-box retailer.

Quick Q1 Recap

Target’s Q1 FY21 revenue surged 23.4% to reach $24.2 billion. This crushed our Zacks estimate and blew away the year-ago period’s 11% growth, which included the early coronavirus lockdown period. At the bottom end of the income statement, TGT’s adjusted first quarter earnings skyrocketed 525% to $3.69 a share to top our estimate by over 60%.

The first quarter marked Target’s third beat of 60% or higher in three out of the last four quarters. Target also provided strong Q2 guidance that called for mid-to-high single-digit comps growth and “positive single-digit comparable sales growth in the last two quarters of the year.”

Since its report, analysts have raced to raise their earnings outlook (see chart).

Business is Booming

Target’s e-commerce boom saw it thrive during the heart of the pandemic and those same offerings will help sustain its growth in the modern retail age. TGT’s same-day offerings feature in-store pickup, Drive Up, and its subscription-style Shipt unit. Along with its new-age shopping push, the Minneapolis-based retailer has focused even more heavily on its own in-house brands for fashion, furniture, food, and more.

TGT’s various store brands have expanded and stood out because of the company’s ability to constantly adapt and stay on-trend, while remaining affordable. These efforts include athleisure brands that challenge the likes of Lululemon LULU, its Good & Gather grocery brand, and many others.

The company's growing slate of in-house brands have helped separate TGT from rivals like Walmart and Costco COST within some key demographics. Target's owned brands grew by 36% in Q1, which company executives said was the strongest increase “ever recorded.”

Target has successfully positioned itself as a fantastic one-stop shopping option and has been able to grow despite Amazon’s AMZN constant pressure on the industry at large. TGT’s Q1 comps jumped 23%, with digital up another 50%—on top of the year-ago quarter’s 141%. And its same-day services climbed 90%.

Wall Street has also focused on Target’s impressive margins that help it stand out against many of its big-box peers. Its Q1 operating margin came in at an “unprecedented” 9.8%, up from a “very healthy” 6.4% before the pandemic in Q1 FY19. Looking ahead, Target expects its full-year operating margin rate could reach 8% “or somewhat higher” to easily top last year’s 7%.

The company has been able to grow its margins despite the new offerings since it is not reliant on separate fulfillment centers or warehouses. “The distinction between a store sale and a digital sale is largely irrelevant. Because of our unique stores and hub model, more than three-quarters of our first-quarter digital sales were fulfilled by our stores,” CEO Brian Cornell said on its earnings call.

Bottom Line

Target’s adjusted 2020 earnings soared 47% on 20% stronger sales. Looking ahead, TGT is expected to post more growth this year, even as it comes up against an unprecedented coronavirus-boosted year. Zacks estimates call for the company’s FY21 revenue to pop another 4.5% to come in at $98 billion to help lift its adjusted earnings by 12%.

Target’s strong post-release EPS revisions help it grab a Zacks Rank #1 (Strong Buy) at the moment. The stock also lands an “A” grade for Momentum and a “B” for Growth in our Style Scores system. And 15 of the 20 brokerage recommendations Zacks has for TGT are “Strong Buys,” with none below a “Hold.”

Despite its market and industry-beating run over the past three years, Target trades at a discount compared to its industry and WMT. Along with its strong valuation, its 1.21% dividend yield tops its industry’s 0.81% average. And the booming U.S. economy looks poised to help retailers as consumers continue to spend.

The stock has surged 9% since its release and it closed at another new high Monday at over $225 a share. The recent run has pushed Target stock right near oversold RSI levels of 70. This could see it face near-term selling pressure as investors take profits and let the stock that’s already soared 95% in the past year possibly cool down a bit.

Nonetheless, long-term investors don’t need to worry as much about trying to time stocks and might want to consider adding Target to their portfolios.

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Target Corporation (TGT) : Free Stock Analysis Report

The Home Depot, Inc. (HD) : Free Stock Analysis Report

Amazon.com, Inc. (AMZN) : Free Stock Analysis Report

Walmart Inc. (WMT) : Free Stock Analysis Report

Lowes Companies, Inc. (LOW) : Free Stock Analysis Report

Costco Wholesale Corporation (COST) : Free Stock Analysis Report

lululemon athletica inc. (LULU) : Free Stock Analysis Report

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