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Better Buy: Nike vs. Target

By Leo Sun - Apr 8, 2021 at 8:15AM

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Which of these resilient retailers is a better post-pandemic investment?

Nike (NKE 0.85%) and Target (TGT 4.32%) both easily withstood the worst economic effects of the coronavirus pandemic over the past year. Nike's sales initially plunged after it temporarily closed its stores but the company quickly recovered. Target's brick-and-mortar and online sales both accelerated as shoppers stocked up on household essentials.

Over the past 12 months, Nike's stock price has risen more than 70%, while Target's stock price has surged over 120%. Both have handily outperformed the S&P 500, but which retail survivor will be the better post-pandemic play?

Campus of Nike's corporate headquarters.

Image source: Nike.

Nike's quick recovery

Nike's revenue declined 4% in fiscal 2020, which ended last May, and its earnings fell 36%. Most of that damage occurred in the fourth quarter when store closures throttled its revenue growth and higher fulfillment costs for online orders, tariffs, and promotions squeezed its margins.

Nike's digital sales surged during the quarter, reflecting the expansion of its direct-to-consumer channels, but couldn't offset its loss of brick-and-mortar shoppers at its first-party stores and other retailers.

However, Nike reopened most of its stores in the first quarter of fiscal 2021. Its revenue rose 4% year over year in the first nine months of the year, and its earnings grew 25% as it offset a slight contraction in its gross margin with tighter cost controls.

During Nike's latest conference call, CFO Matthew Friend reiterated its guidance for "low to mid-teens" revenue growth for the full year, declared its gross margin would "expand up to 75 basis points," and said it was "already exceeding our pre-pandemic levels of business." Based on that confident outlook, analysts expect Nike's revenue and earnings to rise 16% and 96%, respectively, for the full year.

Next year, they expect Nike's revenue and earnings to increase 12% and 26%, respectively, as its growth normalizes in a post-pandemic world. Those growth rates indicate that John Donahoe, the tech veteran who took over as Nike's CEO just over a year ago, is successfully steering the iconic brand through the crisis.

Target's record year of growth

Target's business has been recovering since Brian Cornell took the helm in 2014. Cornell's focus on renovating stores, investing in private-label brands, expanding its e-commerce ecosystem, and using its brick-and-mortar stores to fulfill online orders all significantly widened its moat against Amazon and Walmart.

Exterior of a Target store

Image source: Target.

As a result, Target was well equipped to handle the pandemic. Its revenue rose nearly 20% in fiscal 2020, which surpassed its combined growth over the past 11 years, and its comparable-store sales jumped 19.3%.

Target's brick-and-mortar comps grew 7.2% for the full year as it kept most of its stores open with increased safety measures, and its digital comps surged 145% as more people shopped online.

During Target's latest conference call, CFO Michael Fiddelke claimed that its average "multichannel" guest (one who shops both at its stores and online) now "spends nearly four times as much as a store-only guest and nearly 10 times more than a digital-only guest."

Target's gross margin dipped slightly in 2020, due to higher supply chain costs and sales of lower-margin products, but its operating margin still expanded and its adjusted EPS surged 47%. However, analysts expect its revenue and adjusted earnings to decline 2% and 8%, respectively, this year, as it faces tough year-over-year comparisons in a post-pandemic world.

But next year, they expect Target's revenue and earnings to grow 4% and 10%, respectively, as it continues to gain shoppers, open new stores, and expand its same-day delivery and loyalty services.

The valuations and dividends

Nike trades at 34 times forward earnings, which suggests a lot of growth is already baked into its stock. It pays a forward dividend yield of 0.8%, and it's raised that payout annually for 19 straight years.

Target trades at 21 times forward earnings and pays a higher forward yield of 1.3%. It's a Dividend Aristocrat, having raised its dividend for 49 straight years, and it could become a Dividend King if it crosses the half-century mark this year.

The winner: Target

Nike and Target are both rock-solid retail stocks. But as rising bond yields spark a rotation from growth to value stocks, it makes more sense to buy Target for its lower valuation and higher dividend. Meanwhile, Nike's higher valuation could set a temporary ceiling over its share price.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$156.42 (4.32%) $6.47
NIKE, Inc. Stock Quote
NIKE, Inc.
$108.20 (0.85%) $0.91

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