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Why Target Stock Could Soar in 2019

By Timothy Green – Updated Apr 10, 2019 at 8:54PM

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It's all about online growth.

Check out the latest Target earnings call transcript.

Shares of retailer Target (TGT 0.60%) started off 2018 on the right foot. The stock was up as much as 36% at one point during the year, driven higher by extremely strong results. Not only were the company's stores performing well, but the online business accelerated dramatically, and tax cuts helped to boost the bottom line.

Unfortunately for Target investors, a late-year tumble erased essentially all those gains. Target stock ended 2018 roughly unchanged, despite all the positive developments for the retailer throughout the year.

2019 could be a different story if Target can keep up the momentum. Rapid e-commerce growth could convince the market that the end-of-the-year swoon was unwarranted. If Target can keep digital sales growing at a brisk pace, the stock could recover in a big way this year.

A Shipt shopper pushing a cart in front of a Target store.

Image source: Target.

Making the right moves

If there's one word that sums up Target's 2018, it's aggressiveness. After not having much of an online strategy at all, Target made some big changes last year that set the stage for accelerating online growth.

Target rolled out free two-day shipping on orders of $35 or more in March, waiving that minimum for those paying with the company's REDcard. Two months later, Target revamped its Restock next-day home essentials delivery service. For a fee of $2.99, or $0 for REDcard holders, shoppers can order up to 45 pounds of household items, including non-perishable groceries, and have them delivered the next day. There was originally no minimum order size, but Restock now requires a $35 purchase. Even so, it still beats Amazon Prime Panty on speed and price.

Target also bet on same-day delivery by acquiring Shipt at the very end of 2017. The same-day grocery delivery service is now available in more than 250 markets and uses 1,400 stores to fulfill orders. Target has big plans for the service in 2019. TechCrunch reported last month that Target plans to offer all major product categories through Shipt sometime this year, which will make it a full-blown Amazon Prime Now competitor. And since orders are fulfilled directly from stores, there's no need for Target to build out a vast network of distribution centers.

Target's online push has paid off, with digital sales growth greatly accelerating in the past couple of quarters:

A chart showing Target's digital sales growth.

Data source: Target. Chart by author.

Target is focusing heavily on household items, which makes a lot of sense. With Restock, Shipt, and many standard online orders being fulfilled in stores, these sometimes-bulky items don't need to be shipped very far. Meanwhile, Amazon is reportedly cutting down on unprofitable, bulky, hard-to-ship items under $15 in an effort to boost profits. Target can take advantage by filling that void, and it can do it profitably thanks to its nearly 2,000 stores.

All these initiatives began to bear fruit in the second half of 2018, and they should continue to drive online growth in 2019. Target still has a long way to go to catch up with Amazon, but it's clearly winning market share with its near-50% growth rate.

The sell-off at the end of 2018 probably didn't have much to do with Target itself. While fears about trade wars and slowing global growth may have contributed, it was likely a tumbling stock market that played the biggest role.

If Target can put up solid holiday quarter numbers, particularly online, and keep that online momentum going into 2019, it will be hard for the market to remain so downbeat on the stock. Target trades for about 12 times its guidance for 2018 full-year adjusted earnings. That valuation sets the bar low. Target just needs to keep doing what it's been doing, and the stock will eventually recover.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.

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