Shares of big-box retailer Target Corporation (NYSE:TGT) took an early hit in trading Friday, after word hit that Amazon (NASDAQ:AMZN) is buying grocer Whole Foods Market (NASDAQ:WFM). After falling 12.4% in early trading, shares recovered slightly, and were down just 6.5% as of 12:30 p.m. EDT.
No one knows exactly what plans Amazon has for Whole Foods, but the early thought from the market is that big grocers will be under threat. Target has built out a major grocery business within its stores, and if Amazon upends that either through its delivery service or its brick-and-mortar locations, it could threaten foot traffic.
There's an understanding that Amazon is threatening the very existence of companies like Target. And while that may not end up being the threat from the Whole Foods acquisition, it's possible Amazon will end up using the retail locations for another purpose, like launching drones, or as hubs for its own delivery service.
Amazon is moving more and more into brick-and-mortar stores, and the threat is that it will eat into Target's sales long-term. And that could very well be possible. But Amazon buying a grocery chain with a fairly small footprint nationally doesn't yet change Target's fortunes. It's more important that Target execute on its own online and brick-and-mortar strategies to compete in retail today.
While I would watch closely what Amazon does, Target still trades at just 12 times forward earnings and pays a 4.2% dividend yield. If it can adapt its business to compete with Amazon, it will be fine long-term, making today's discount a great buying opportunity.