Target's (TGT -1.65%) stock has more than doubled over the past five years as the retailer has impressed investors with its robust growth rates and resilience against Amazon (AMZN -1.17%) and other formidable rivals.
But with its stock hovering near all-time highs, can Target continue to attract the bulls over the next five years? Let's take a closer look at its core business, its ongoing expansion efforts, and its five-year outlook to find out.
How did Target fend off Amazon?
When Brian Cornell took over as Target's CEO in 2014, the retailer was struggling with sluggish comparable store sales and intense competition from Amazon and Walmart (WMT -0.73%). The company had also just suffered a massive data breach and was racking up big losses from a disastrous expansion into Canada.
Target continued to struggle throughout 2015 and 2016, but Cornell maintained a longer-term view by renovating its aging stores, penetrating urban areas with smaller-format stores, and turning its brick-and-mortar stores into fulfillment centers for online orders, deliveries, and in-store pickups.
Target also launched dozens of private-label brands to boost its margins and differentiate itself from Amazon, Walmart, and other big retailers. It tied all that together with its e-commerce ecosystem, which it expanded with more delivery and in-store pickup options. It also matched Amazon and Walmart's prices and expanded its Target Circle loyalty program.
A retail survivor becomes a growth stock again
Those efforts gradually bore fruit. Target's comparable sales rose 1.3% in 2017, 5% in 2018, and 3.4% in 2019. That growth was buoyed by its strong digital comps, which rose year over year by 27% in 2017, 36% in 2018, and another 29% in 2019.
This year, the COVID-19 pandemic lit a fire under Target's online and brick-and-mortar stores. In the first quarter, its total comps jumped 10.8% and its digital comps surged 141%. In the second quarter, its total comps rose 24.3% as its digital comps soared 195%.
As a result, Target's total revenue rose 18% year over year in the first half of the year, and its diluted EPS jumped 17% -- even as higher fulfillment and safety expenses reduced its operating margin by 30 basis points to 6.6%.
Target didn't provide any guidance last quarter, but analysts expect its revenue and earnings to both rise by 13% for the full year. But next year, analysts expect its revenue to dip 1%, mainly due to tough comparisons to the pandemic-induced shopping in 2020, and for its earnings to rise just 7% year over year.
Why Target should head higher over the next five years
Target's growth will inevitably decelerate after the pandemic ends, but its stock should continue rising over the next five years, for four simple reasons.
First, dozens of major retailers -- including JCPenney, Pier 1 Imports, and Neiman Marcus -- filed for bankruptcy this year as the pandemic pushed their struggling businesses over the edge. Big diversified retailers like Target, Walmart, and Amazon will likely absorb many of those shoppers.
Second, Target is one of the few American retailers to continue to expand its brick-and-mortar network. It ended the first half of 2020 with 1,871 stores, compared to 1,822 locations at the end of 2016. That expansion will support the logistics needs of its e-commerce ecosystem.
Third, Target continues to attract younger shoppers. In Piper Sandler's latest "Taking Stock with Teens" survey, Target was the third-most-popular destination for beauty products behind Ulta and LVMH's Sephora. Target is also aggressively targeting millennial shoppers with healthier foods and trendier private-label brands.
Lastly, Target has raised its dividend annually for 49 straight years. Once it crosses the half-century mark, it will become a Dividend King of the S&P 500, and become even more attractive to income investors. Its forward yield of 1.7% might not initially seem impressive, but it could significantly amplify its total returns.
The bottom line
A lot can happen over the next five years, but Target's scale and forward-thinking strategies should help it outperform the S&P 500. It also generates nearly all of its revenue in the U.S. -- which could partly insulate it from the ongoing U.S.-China trade war and other geopolitical risks. In other words, Target should remain a great stock to "buy and forget" for long-term investors.