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Target Is Expecting Record Profits This Year

By Parkev Tatevosian, CFA – Sep 3, 2021 at 7:45AM

Key Points

  • Target's previous high in operating profit margin was 7.6%, reached in 2013.
  • This year, management expects at least 8%.
  • The stock is up over 40% year to date but still trades at a fair valuation.

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The company is likely to generate the highest operating profit margin it has in a decade.

Ever since the pandemic's onset, sales have surged at Target (TGT -5.62%). The company's wide aisles, stocked shelves, and multi-category assortment were exactly what shoppers were looking for. 

Additionally, Target's investment in its digital channel with varied fulfillment options attracted consumers looking for choices. The momentum continues even as economies reopen, and Target expects to achieve record profits this year. 

Adult and child looking at clothes in store.

Image source: Getty Images.

The good times continue for Target 

Things are going well for Target. Indeed, CFO Michael Fidelke said this in the company's most recent conference call: "I've been at Target for more than 17 years now, and I've never experienced a time like this when every aspect of our diverse strategy is coming together like we're seeing today."

To put its operating performance into context, Target grew revenue at a compounded annual rate of 3.8% over the last decade. Impressively, revenue increased by 19.8% in 2020. After such an outperformance, there was a possibility of sales turning negative in 2021 as customers had more options with their time and money. That's not playing out as Target continues to grow. In the first six months of 2021, revenue is up by 15.7%.

Fortunately for shareholders, consumers like the same-day fulfillment options that Target provides. Those include buying online and walking into the store to pick up your order; buying online and driving into a Target parking lot to have an employee deliver your purchase to your car; and buying online and having items delivered to your home within hours for an additional fee. These are more profitable transactions for Target because it saves the cost of shipping the item to people's homes. In the most recent quarter, over half of digital sales were fulfilled by one of these services.

The trends have made management optimistic about operating profits for the rest of 2021, guiding investors to look for an operating profit margin of at least 8%. That would be the highest rate Target has achieved in at least a decade. You can start to understand why Fidelke is talking about this year being the best he's experienced in his 17 years at the company.

What this could mean for investors 

Investors have noticed, and the stock is up 41% year to date. Still, Target stock is trading at a forward price-to-earnings ratio (P/E) of 19, which is a fair price. With much of the excellent operating performance priced into the stock, there is no reason for investors to rush out and buy Target stock. However, it does provide good value for long-term investors who will buy and hold for at least several years.

Another option could be to put Target on your watch list and wait for a pullback in the stock price before buying. That way, you may find an opportunity to buy at a lower P/E. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

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$154.93 (-5.62%) $-9.23

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