Target Soars 19% On Earnings

In this episode of MarketFoolery, host Chris Hill chats with analyst Seth Jayson about some business news. Shares of Target (TGT 1.26%) rocketed after the company's earnings report, but what does the retailer really have over its competition? Lowe's (LOW -0.33%) stock popped on earnings, too. At least this move makes more sense than Home Depot's (HD -0.05%). Walmart (WMT -0.40%) has some strong words for Tesla (TSLA -3.66%) regarding the latter's solar panels. Unfortunately for Tesla, Walmart also has a legal team and just a bit of spare cash sitting around. Plus, the hosts answer some listener questions about 401(k)s and the always alarming (but perhaps even more alarming than usual) threat of an imminent recession.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Aug. 21, 2019.

Chris Hill: It's Wednesday, August 21st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, it's Minnesota's favorite son, Seth Jayson. Thanks for being here!

Seth Jayson: Next to Kevin McHale. 

Hill: Yes. You're on the Mount Rushmore of Minnesotans.

Jayson: And what's-her-name? Michelle Bachmann. After those two --

Hill: And Bob Dylan.

Jayson: And Bob Dylan. I might be above Bob Dylan. 

Hill: Fun fact: Bob Dylan and Kevin McHale, from the same town. Hibbing. Both from Hibbing.

Jayson: Bob kind of came from outside Hibbing. 

Hill: The suburbs of Hibbing? 

Jayson: Zim. It's the boonies outside. Rumor has it -- one of my best friends growing up, his mom lived next door to Bob for a while, maybe when Bob was in Hibbing, and they were childhood playmates. Ginny.

Hill: Right now, any listener who is a Target shareholder is like, "Enough with the Minnesota stuff!"

Jayson: "Tell us about the Target!"

Hill: Let's talk about the Target. And we will. We're going to dip into the Fool mailbag. We're going to talk 401(k)s. But the day does belong to Target. Shares are up 19%.

Jayson: When's the last time that happened? 

Hill: Never. This is the single biggest day the stock has ever had, and Target went public 52 years ago.

Jayson: What is this, the Silicon Valley? What? It's just Target, everybody. Come on!

Hill: Well, you tell me. Their second quarter, everything was amazing. Profits and revenue were higher than expected. Same-store sales beat. This was a monster quarter. 

Jayson: Pretty good.

Hill: [laughs] It's 19% "pretty good."

Jayson: Nineteen percent pretty good. Yeah. Comp looked pretty good for a giant company that's not growing a ton. Online was good. Up 34%, I saw. That's down sequentially. But a lot of that is the buy online, pick up in store, which is a fun thing that Home Depot and others are doing, the Walmart. Target isn't alone in that. But it's pretty handy. I'm starting to like that more and more. A lot of times, you want to go to Target, and you want to buy the 15 things you always buy at Target, but do you want to walk around Target? Even if you kind of like Target? Not every time. So, that's good news for them. It brings people by, maybe they'll stop in the store.

I happened to be clad right now -- this goes to the comp -- 

[zipper sound]

Jayson: -- this beautiful shirt --

Hill: Which no one can see but me.

Jayson: -- is a Target special. Can you hear the zipper sound? I'll do it again.

[zipper sound]

Jayson: Is this a G-rated show?

Hill: I'm happy to say he's zipping back up.

Jayson: [laughs] But, I did that because essentials, beauty, and apparel comped at 5% according to the call, and baby, intimates, sleepwear, and performance activewear -- and, I have to say, as somebody who, I've got high-end, Under Armour stuff, and I have my favorite stuff for running, from this small company called...what are they called? [groans]

Hill: Having a senior moment?

Jayson: You know, the one in Falls Church? Ugh, why can't I remember? Anyway, they're a small running store chain. Their house brand running gear is super great. The shirts last me like 10 years. They're awesome. Anyway, I like Target's performance apparel, too. It's pretty good. What is it, C9 or something, by Champion? It's good stuff and it's super cheap. This shirt was $8. I get shorts from them that are equivalent to $40 Under Armour shorts for $20. That's one of the reasons Target is doing well. 

As far as the stock price goes --

Hill: It's at an all-time high.

Jayson: All-time high. The multiple is getting a little pricey as far as I'm concerned. I guess I understand why it moved to where it is today. I don't know that I see it zooming up from here, because we're still talking about a company that's not going to grow a ton. You're getting GDP growth out of Target probably, unless they can do a little bit as far as profitability goes, but I'm not sure how many levers there are left to pull there.

Hill: I think that's true, although I think this is a quarter that demonstrates how well Target is executing. To widen the lens a little bit, we've talked a lot about retail lately on this show and on Motley Fool Money. This is one more data point in terms of, there are retailers out there who are executing well, and then there are the ones who just aren't. 

Jayson: And then there are malls. 

Hill: Target is in the category that's executing well.

Jayson: Yeah. The one I see is in Merrifield Town Center. For those who aren't from this area, that is a hip, bustling town center, which around here basically means mixed use, like you imagine New York City, were it up to date, but 50 years ago. In other words, six-story buildings with commercial stuff on the bottom, and nice apartments and condos above. There's a lot of activity on the street. Nice stores. You've got lululemon. They put in a new Barnes & Noble. When have you ever seen that before? Foot traffic there is incredible. Target was one of the anchors that brought people in there. I go to that Target. It's always pretty busy because it's in the middle of a very hip location. But that is one of the advantages that Target has. They're willing to do that. They're seen as a step up in style terms from a Walmart or a Costco. The nearest Walmart to me, I have to drive out to the part of Fairfax where suddenly it turns from D.C. metro area to, "Wow, I'm in the country and this is a dirt road if I take a left turn." Literally, you're on a gravel road after half a mile. That's the difference with Target, and that's an opportunity when you have people with money living in more urbanized areas. 

Hill: Let's move on to Lowe's. Yesterday we talked about Home Depot. Today, Lowe's. Second quarter was strong. Profits and revenue higher than expected. Same-store sales actually a little bit better than Home Depot's yesterday. Shares of Lowe's are up 10%. I'm not knocking Lowe's; I just look at this quarter and go, this seems like a good quarter --

Jayson: But...

Hill: [laughs] I'm a little surprised the stock is up 10%. But, then again, I was surprised that yesterday, Home Depot was up when they were warning about what the rest of the fiscal year was going to look like.

Jayson: Yeah, kooky things happening. I like to call Lowe's "the blue Home Depot." Well, blue Home Depot with much lower profit margins. This was a decent quarter for them. They've been trying to turn it around. Maybe it's just that people were still expecting them not to do all that great. 3.2% comp growth. That was mostly ticket value growth. The transaction growth was not was huge, like 0.4% or something. Online growth, only 4%, which stands out to me as, hey, that's an opportunity to do better, which is a nice way of saying, "Boy, that's not so great compared to everybody else." Gross margin was down slightly. Operating margin up 98 basis points. That's good news. I say that because I'm looking, I'm going to show this piece of paper to the microphone, so you can all see it here -- [paper crinkling] -- this is my spreadsheet full of interesting charts. If you looked at this, you'd notice that Lowe's margins are two-thirds or so of Home Depot's margins in terms of operating profits. That's both the problem and the opportunity. You read some analysts saying, "I think Lowe's should be worth $140 a share." I thought, "Really?" Well, I modeled it out. If, within two years, Lowe's got to Home Depot's operating margins, and you discounted those earnings by 12%, which is what I do, then yeah, the shares would be worth around $145 in today's terms, or the five-year price target would be. But that's a hard thing to do. 

So, can Lowe's continue to improve from here? Probably. Are they going to reach Home Depot-like margin levels? I don't know. That's not a given. In the meantime, the stock is trading at a much higher multiple. 

So, good for Lowe's. Not sure I'm a buyer at this point. But it's always better to see a company doing well than to see them stinking it up.

Hill: Absolutely. Lowe's, on the call, did discuss one of the things that came up on Home Depot's call yesterday, which was the lumber costs and the impact on the business. To your point about their margins, Home Depot's got that much greater footprint with contractors as opposed to folks like you and me walking in and out of the store looking to fix something.

Jayson: I'm too ignorant about their segment margins to know how much the effect is there. To give a little more detail on the quarter, according to management, they said that tools, appliances, decor, hardware, mill work, which is the fancy wood you buy, did better than usual, along with deck chairs. Everyone seems to be doing great with outdoor living. It's 100-some degrees out everywhere in the country. I can't imagine why everyone's buying deck chairs. Maybe it's the umbrellas that are selling. 

Hill: Yeah, if you're going to get deck chairs, you definitely need an umbrella to go with that. 

Jayson: And a fire extinguisher. 

Hill: Quick shout out to our woman behind the glass, Heather Horton, who just sent me a message on Slack. Potomac Running Company.

Jayson: That's not the one I'm thinking of!

Hill: Oh, that's not the one?

Jayson: No, but it's another. We have a couple of great small chains in the D.C. area. The one I'm thinking of is nationwide and I'm still spacing on them. Anyway. It'll come to me tomorrow.

Hill: I was going to say, once we leave the studio.

Jayson: In the shower, or maybe during my run today.

Hill: Before we dip into the Fool mailbag, one other story of note. This week, Tesla CEO Elon Musk announced a solar panel rental program. Also this week, Walmart has filed a lawsuit in New York State against Tesla. Walmart is alleging negligence after Tesla solar panels, which were installed on seven Walmart locations, caught fire.

Jayson: Actually, they have them installed something in the hundreds of locations. Seven of them caught fire, and then I believe they said, "We looked, and we don't like the way the hookup looks on some of these, so we don't use them anywhere anymore." Not very happy. My suggestion -- I don't know if Elon listens to us --

Hill: I doubt it.

Jayson: My suggestion is, if you're going to do crummy work, you do it at Chris Hill's house, not on Walmart's roof.

Hill: [laughs] Right. I don't have an army of lawyers, whereas Walmart probably does. 

Jayson: Yeah. If you burn down Chris Hill's house and put his family out in the streets, probably nobody cares. Walmart? They're going to notice.

Hill: They've got some lawyers. 

Our email address is [email protected]. Question from Roy in Tel Aviv. 

Jayson: Wow!

Hill: He asks, "Is this a good time to invest in stocks? The reason for asking, many experts assess that a recession is coming."

Jayson: It's always a good time to invest in stocks, isn't it? Come on! The reason is...brainteaser! The reason is...?

Hill: Go on?

Jayson: We have no idea where the market's going to go, right? Yesterday, it was going to keep going down. A couple of days before that, it was going to keep going down. It's bouncing around back and forth. Nobody knows anything. No one knows if there will be a recession -- well, there will be one sooner or later. Nobody knows the timing. Nobody knows if the stock market will go lockstep with a recession. Obviously, markets and economies are different things, although, when you have a recession, you tend to see the stock market plunge because companies aren't doing as well. So, the short answer to that is, yeah, you should always be investing in a measured pace in companies you like for the long term, so long as you've got money available, because you cannot time the market. You cannot time recessions. If anybody could, we'd know about it. Doesn't happen. 

Hill: Yeah. I think that's right. He's right about the fact that it seems like there's a growing drumbeat, or certainly an increasing number of people who are saying, there are different indicators that point to a potential recession. But, yeah, along with that, what you get in the financial media is, so-and-so goes on TV or gets quoted in the press, and they got it right one time. Never mind the fact that they keep calling for it every six months. They get the credit for that one time they called it.

Jayson: We've been going to have a recession here in the U.S. for the past 10 years. 

Hill: I would say the past seven years. We had an actual recession 10 years ago. 

Jayson: Yeah, but everyone said it was going to get worse. So, nobody was buying at the bottom then. Everybody kept looking for the next leg down after that. We will get one eventually, but you don't know where. I would argue that probably, there are heightened risks now; but you don't want to say to yourself, "Now I know for sure," because five years ago, I thought there were heightened risks, and I didn't stop investing, luckily, or I'd be sitting on more cash and looking very sad. 

Hill: Question from Patrick in Iowa, who writes, "I'm 17 years old. I have a long-term internship at an industry-leading company. This week is my one-year anniversary, so my company will begin matching 100% of my first 3% and 50% of my next 2%. My question is, what percentage of my income should invest in my 401(k)?" First of all, kudos to Patrick!

Jayson: Good for him! 17, he's got that going.

Hill: An amazing a head start! Way to go, Patrick!

Jayson: Second of all, where in Iowa? I've been almost everywhere in Iowa on RAGBRAI, which is this big bike ride where 10,000 people sweat their way across Iowa every summer. I've probably driven my bicycle right past this guy's house by now.

The answer to that is, I believe, if you've got it to spare, as much as you're allowed to put in. Pack away the maximum that you can or the maximum that you are allowed, no matter what the match, because every buck you put in now has a lot longer time to grow into more bucks. That's an easy one. And that goes for everybody out there -- pack away as much as you can. You probably won't miss it. Once it's out of your paycheck, you stop worrying about it. 

Hill: You just reminded me, when I was a little bit older than Patrick, in this situation of, "This is my first opportunity to contribute to this type of plan," and I remember my older sister saying, "Max it out!" It was my first real paycheck. I was like, "Well, I don't know. I like having money. At least I think I'm going to like having money, because I've never had it before." And that's what she said to me. She said, "You're not going to miss it. You're going to adjust your living style to whatever your take-home pay is. Max it out!" And it's one of the best things I ever did. 

Jayson: Yeah. The other thing is, once you have a pile of money, a strange thing happens, at least to me, and I've seen it in other people and in my kiddo -- you start to not to want to spend the money. It's like Mr. Burns when someone hands him a dollar. He says, "I think I'd prefer to keep the dollar." I forget the context, but you stop wanting to spend this money. Say you've got $100,000 saved up, and you think to yourself, "Wow, I could buy a sweet Mustang convertible," or something. Then you look at that pile and you think about how long it took to get there, and you think about what it means to you -- it means you're not worried about your retirement, it means you're not worried about whether or not your current car breaks down, you're not worried about any number of things that can happen, and that to you becomes worth more than new stuff. There's more than just the financial logic of watching this grow for a longer period of time. There's the change that will come from the discipline itself. So, there you go, Patrick!

Hill: I say from time to time that we have the best listeners. And one of the reasons I love our listeners is emails like this, where it's like, we've got a guy in Tel Aviv and we've got a teenager in Iowa.

Jayson: And, Patrick, get ahold of us, because I need to know if we're going through your town next year on RAGBRAI. 

Hill: Do you think Patrick wants you coming through his town on a bike, sweating like that?

Jayson: Iowans love RAGBRAI.

Hill: [laughs] The one and only Seth Jayson! Thanks for being here! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show was mixed by Heather Horton. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!