The coronavirus pandemic has been rough for most of the retail sector, but Target (TGT -1.06%) has thus far made it through the crisis relatively unscathed. The retail stock is up 16% year to date, and the company posted one of its best quarterly reports ever in the second quarter.
Comparable sales in the quarter jumped 24.3%, and adjusted earnings per share (EPS) nearly doubled, rising from $1.82 to $3.38. Target's investment in same-day fulfillment services like Drive Up, Order Pickup, and Shipt have clearly paid off as sales from same-day services jumped 273% in the quarter, accounting for 6 percentage points of the company's growth. Initiatives like Drive Up and Order Pickup led to more than 90% of orders being fulfilled by stores, a cost-effective way of meeting e-commerce demand.
Is Target a buy? Let's dispense with the suspense and say, "Yes." Here's why Target looks like a great stock to own for almost any investor.
Image source: Target.
Short-term tailwinds
Target's performance has surged during the pandemic because the company is one of a handful of retailers, along with Walmart and Costco, that functions as both a seller of discretionary items like apparel, home goods, and electronics, as well as staples, like food, cleaning supplies, and medicine. In fact, Target is in an even better position than Walmart and Costco because its business is more evenly divided among those categories than those two peers, which both make a majority of their sales from groceries.
That product diversification has been a huge advantage for Target during the pandemic. While sales at clothing stores have plunged during the crisis at rivals like Gap, TJ Maxx, and Macy's, Target saw apparel sales jump double digits in the second quarter, a sign that consumers are consolidating shopping trips and stopping at Target to buy groceries and pick up other items at the same time.
The company also seems well-positioned to capitalize on the major shopping events of the second half of the year, especially with key rivals struggling during the pandemic. Those include back-to-school season, which Target has extended to adapt to staggered school opening schedules in much of the country.
Target should benefit as parents seem likely to grab what they need for school next time they make a food run or a pharmacy pickup at a store. Similarly, the company is stepping up its selection of Halloween costumes, betting that Americans will still want to celebrate the holiday, even if trick-or-treating may be out this year.
Again, Target seems poised to pick up share from the likes of Party City and pop-up Halloween shops. Finally, the company's investments in same-day fulfillment, its focus on toys, the breadth of variety, and its strength in e-commerce should make it a winner during the holiday season.
Long-term strengths
With its current momentum, Target seems likely to continue taking market share from its stumbling competitors and should only emerge from the crisis in a stronger position. Management said the company gained $5 billion in market share in the first half of the year and should add to that in the second half as the same coronavirus-induced economic patterns remain.
Additionally, Target is opening small-format locations in underserved parts of cities and college towns that pair well with its omnichannel and same-day fulfillment strategy. Those store openings should help drive growth both in-store and online.
The retailer's arsenal of private brands also differentiates it from department stores and off-price chains that are dependent on major brands, and give customers a reason to shop. They also deliver higher margins than name-brand products. Target's new private food brand Good and Gather has reached $1 billion in annual sales less than a year after its launch, and the company recently added a premium line to the brand called Good and Gather signature.
While much of the brick-and-mortar retail sector struggles, Target appears to have cracked the code for success in the modern, digital era, which is part of the reason the stock is up more than 150% over the last three years.
The fundamentals
In addition to its growth prospects, Target is a Dividend Aristocrat, having raised its quarterly payout every year for the last 49 years, and offers a 1.8% dividend yield. The stock is also very reasonably priced at a price-to-earnings ratio (P/E) of just 21.7, which is significantly cheaper than the S&P 500's current P/E ratio of 27.8.
Looking at those factors, it seems that Target has something for almost every investor. It offers income and value for those seeking a dividend and a favorable valuation, and its growth prospects seem to be among the best in its sector as the company has shown it can withstand competition from Amazon or any other player.
After a red-hot second quarter that featured monster growth on the bottom line, Target should have more gains in store. Like its stores themselves, Target is almost certain to have whatever investors are looking for.
