3 Reasons Target’s Stock Could Rise

How the struggling retailer -- and its stock -- could return to steady growth.

Aug 28, 2014 at 5:31PM

Target (NYSE:TGT) investors haven't had much to celebrate lately. The shares of the national retailer have fallen well behind the market since late last year.

TGT Chart

TGT data by YCharts.

That's when the business started getting pinched from two directions. First, a holiday season reach of customers' personal information ballooned into more than $150 million of expenses and depressed shopper traffic levels. And then Target's expansion into Canada went from bad to worse, with losses growing into the billions.

As dire as that sounds, Target, under new leadership, could mount a turnaround in the quarters ahead, which might spark a recovery in the stock. Here are a few of the biggest reasons why the retailer's shares could climb higher from here.

U.S. growth returns

There's no question that Target is struggling in its biggest market. Comparable-store sales growth was flat in the U.S. last quarter, as a decline in transaction volume offset an improvement in average spending per transaction. Profitability also fell thanks to stepped-up promotions. Gross profit margin was down more than 1 percentage point from last year.

TGT Gross Profit Margin (TTM) Chart

TGT Gross Profit Margin (TTM) data by YCharts.

But those are problems that almost every retailer are having these days. Wal-Mart (NYSE:WMT), for example, posted flat comps last quarter as well, and also cut its profit forecast for the year. In other words, Target is doing about as well as you'd expect in a tough retail environment.

But it wouldn't take much of a change to get sales growth back on track. Comps are already improving, albeit slowly. They were negative 0.3% two quarters ago, flat this past quarter, and trending at roughly 1% higher in July. If that rebound continues, Target could quickly find itself back at steady sales growth, with earnings growth just around the corner.

Canada gets better

Despite a 63% sales jump, the new Canada segment cleaved $200 million from Target's second-quarter earnings. And that loss was actually up from the $170 million hit in the prior-year period. However, Target's management is at least aware of the scope of the problem with this expansion. New CEO Brian Cornell said in the earnings conference call that the stores had serious pricing, inventory, and assortment problems that combined to "disappoint many of our Canadian guests." 

That's why the company is in the middle of what's basically a relaunch in Canada. Target is revamping its stores and adding products by the tens of thousands, including the type of exclusive and designer brands that local shoppers had expected all along. In fact, roughly half of the 70,000 products in a typical Canadian store will be new by the time we reach the holiday shopping season. Target didn't make a strong first impression on customers in this market, but finally offering the right product mix would go a long way toward fixing that mistake.

A valuation rebound

A rising valuation would be the most direct catalyst for Target's shares to rise. But for that to happen the stock would need to be cheap right now, or at least cheaper than usual.

And that's definitely not the case if you're simply looking at earnings. By that metric Target's P/E of 25 is actually the most expensive valuation the retailer has seen in a decade. But remember, those Canadian losses have depressed profits recently, which makes Target's P/E ratio look inflated. 

A better metric might be price-to-sales, which doesn't paint the retailer as particularly overvalued.

TGT PS Ratio (TTM) Chart

TGT PS Ratio (TTM) data by YCharts.

In fact, at roughly one-half times sales, its valuation is near a three-year low and sits at about the same ratio as Wal-Mart's, despite Target's higher profitability. This suggests the stock has some room to grow -- if Target can overcome its recent struggles in the U.S. and Canada.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers