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Could Target Be a Millionaire-Maker Stock?

By Demitri Kalogeropoulos - Updated Apr 15, 2021 at 2:52PM

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The retailer should grow again in 2021 after a record performance last year.

It won't deliver the excitement of an investment in a tiny tech stock or cryptocurrency, but Target (TGT -2.89%) might be just the thing your portfolio needs to supercharge returns over the long term. The retailer is primed for a new level of faster, more profitable growth following a record 2020. It is flush with cash thanks to that pandemic-related demand surge, and management has several attractive initiatives it can fund with those resources -- including higher cash returns to shareholders.

With that positive backdrop in mind, let's look at a few ways in which a Target investment could bolster your retirement portfolio over the next few decades.

Young woman sitting on a couch with a laptop open on her lap and a credit card in her left hand

Image source: Getty Images.

Market share

Most national retailers, including Kroger, Walmart (WMT -0.87%), and Costco, achieved strong sales growth during the COVID-19 pandemic. But Target's success stood out even among these surging peers.

The company added $15 billion to its sales base last year, equating to a 20% increase. That spike came from the combination of a 145% boost in the digital channel and a 7% uptick in comparable-store sales. It also involved significant market-share gains.

CEO Brian Cornell and his team estimate that a full $9 billion of its added sales in 2020 came at the expense of rival retailers. In early March, management credited "the strength of our unique, multi-category assortment" with helping Target grow sales last year by more than it had in the previous 11 years combined.

More than just growth

Target's profitability trends are just as impressive. Operating income jumped to 7% of sales in 2020 compared to 6% a year earlier. Sure, some of that increase can be pegged to the unusually high sales surge. But much of the expansion came from the popularity of Target's ultrafast fulfillment offerings like same-day delivery. Its wider assortment of consumer discretionary products like home furnishings, meanwhile, allowed it to capture higher prices as people sought to splurge in certain categories.

TGT Operating Margin (TTM) Chart

TGT Operating Margin (TTM) data by YCharts.

That success helped annual operating cash flow jump to over $10 billion last year, which was easily enough to cover a rising dividend payment, spending on stock buybacks, and robust investments into long-term growth projects like store remodels and the e-commerce platform. Investors can look forward to a steady stream of rising cash returns from this Dividend Aristocrat, which should amplify long-term returns.

Price and value

The main drawback to Target's stock today is its high price. Shares have more than doubled since last April. Costco, Walmart, and Kroger each underperformed the market by a wide margin during that time period.

TGT PS Ratio Chart

TGT PS Ratio data by YCharts.

You can see more evidence of Target's premium valuation in its price-to-sales ratio, which is currently sitting over 1.1. That's well above what you'd pay for Walmart, and even beats the valuation on Costco, a Wall Street darling. Investors are clearly expecting big things from Target over the next few years, and they've pushed the stock price up to reflect those high hopes.

But while its elevated price might take it off the "no-brainer" stock buy list, you might still want to put some Target shares in your portfolio. The shift toward multichannel shopping appears poised to play out over many more years, and this company has demonstrated how it can win more of that growth while raising its profit margins. Don't let Target's share-price rally keep you away from that attractive business. You might look back in a few years and be glad you paid a premium for the high-performing stock.

Demitri Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$168.05 (-2.89%) $-5.00
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$137.86 (-0.87%) $-1.21
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$557.28 (-0.66%) $-3.68
The Kroger Co. Stock Quote
The Kroger Co.
KR
$49.85 (0.47%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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