Target (TGT 1.99%) shares are down 8.7% since the start of the year. The stock took a hit when this usually "good student" of the retail world reported disappointing holiday sales and, so far, it hasn't recovered. Though this might be a wakeup call for investors, reminding us that even the strongest players are vulnerable to competition or lower demand, this dip in the Target story shouldn't ruin investor appetite for the shares.
Target remains attractive for many reasons: Consumers like the prices and delivery options as well as the e-commerce platform, Target is ramping up offerings like grocery and expanding its successful owned brands, and the company has a track record of positive earnings surprises. Let's explore these reasons a bit more and see what they say about the long-term viability of this retailer.
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Hoping for bargains
Let's talk prices. Who doesn't love a deal? According to the National Retail Federation, almost all U.S. shoppers regardless of age and income regularly shop at discount stores hoping for bargains. Target is known for good value on everyday items -- and sales on various products often lead the consumer who came in for just one product to make additional purchases. Though Target was offering 20% off furniture, bath, bedding, and patio items for the Presidents Day holiday, customers don't have to wait for a holiday to find sale items at the retailer. While we can count on prices driving shoppers to discount retailers, Target isn't the only game in town. Competition from Walmart (WMT +0.00%) or online-only players such as Amazon.com means Target has to offer more than just discounts.
As we've seen in the company's earnings reports, delivery options and e-commerce are bringing in customers. In the third quarter, Target said same-day services (including order pickup, drive-up, and its delivery service Shipt) accounted for 80% of the company's digital comparable sales growth. And online sales growth increased 31% during the period. When Target reports fourth quarter and annual earnings on March 3, investors should keep an eye on progress in these areas as they are important to consumers, and therefore, represent solid revenue drivers. For example, 67% of U.S. shoppers have used buy-online-pick-up-in-store services from various retailers over the past six months, according to a study by Radial and NAPCO Research. And 98% of retailers offering this service say customers make additional purchases in-store when they are picking up their order, the study claimed.
Grocery and owned brands
As for future growth potential, look no further than grocery and Target's private-label brands. This past fall, Target launched a new grocery private label called "Good & Gather" to strengthen its presence in the food market. By the end of this year, it will include more than 2,000 products. Target has about 20% of sales related to food and beverage, according to its 2018 annual report, so it isn't likely to catch up to rival Walmart overnight when it comes to food. Grocery accounts for about 55% of Walmart's U.S. sales, according to Statista. While shoppers probably won't make Target their first grocery destination, Target customers are more likely to stay in store to make some grocery purchases if they are offered a more attractive product assortment.
When it comes to its other private-label brands, Target has grown its children's apparel line, Cat & Jack, into a multi-billion-dollar brand. Target's latest additions are All in Motion, the company's "size inclusive" activewear brand, and Open Story, its premium luggage brand. In both cases, Target turned to its customers to ask what they wanted from such product lines. In addition to working these elements into the designs, as always, Target's goal was to keep prices reasonable. While not all of Target's 42 private-label brands bring in billions, they do all contribute to improving the company's margins. And the Cat & Jack success story shows Target understands its customers' needs -- and can deliver results.
The Target package
Though Target's holiday numbers disappointed, Target maintained its guidance for fourth-quarter earnings per share. Still, some stock investors and analysts might be hoping for more. Target's earnings have surpassed analysts' estimates for the past four quarters, so if that trend is broken, the shares might suffer in the short term. As it stands now, the stock is trading at about 18 times earnings, a discount to Walmart, which is trading at more than 23. Wall Street's price forecasts imply 16% upside from Target's current share price. Considering the whole Target package, and with expectations that e-commerce sales will continue to grow, today's price seems like a pretty good bargain for those with an eye toward the long term.
