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How Target Crushed the Market Over the Last Five Years

By Jeremy Bowman – Oct 21, 2021 at 9:00AM

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The retailer has reinvented itself and developed a singular business model.

Believe it or not, Target (TGT 0.89%) has performed as well as Amazon has over the last five years. A combination of investments in ominchannel infrastructure, owned brands, and a new small-format store model has delivered strong growth and made the company a unique entity in the retail industry.

In this Motley Fool Live segment recorded on Oct. 7, Fool contributor Jeremy Bowman explains why Target stock has outperformed and why it's poised for more gains.

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Jeremy Bowman: Here's some of the numbers. Stock is up 235% or 287% with dividends reinvested. The company is also a Dividend Aristocrat, which I think a lot of people don't know. Its yield right now is 1.6%, which is fair, but still nice to have. Over the last five years, we got 50% dividend growth, which is great, they hiked it this year from $0.68 cents and $0.90, so a sign of confidence in the business growth.

You've got adjusted earnings per share up about 160%. In five years, that's pretty outstanding. Some of this is pandemic tailwinds, which I'm going to talk about, but it's also a lot of business execution and revenue, you have about 50% growth there. Let's talk about why that happened and how that's going to keep driving the company's growth forward. Target's same-day fulfillment services. This is this is their program with Drive Up, the curbside pickup shift and then their just standard in-store order pickup that have taken off. Drive Up sales are up more than 1,000% since before the pandemic.

I think what's special, a lot of retailers offer curbside pickup, but there's only a few retailers that can sell you everything and have that multichannel broadline business model, and I think basically it's Target, Walmart, Costco, and Amazon. Only Target and Walmart are really doing this curbside pickup thing. Target, they've penetrated urban areas a lot better than Walmart. You can stop by Target and pick up almost anything you need on your way home or whatever from work when you're out. I think that's why that's done so well for them. This is a unique thing compared to Walmart or Amazon. Their stores fulfill more than 95% of their orders or roughly 80% of their online orders. Target is getting that e-commerce business, but they are fulfilling it with their stores, which is a much cheaper way to do that. That's been really rewarding for the company and a great driver of the bottom line.

Their owned brands are over-indexing these other private-label brands. Their latest one was All in Motion, an athleisure brand. Growth in that category was up mid-teens in the last quarter, it's got 10 billion-dollar brands right now, which is pretty good. Companies like Procter & Gamble and Coke, they have about 20 billion-dollar brands, and those companies are basically the tops in brand building. I think that's pretty good that Target has 10 of those.

The company took $10 billion in market share in 2020, so really outperformed its peers. You think of department stores and others that struggled, Target had comp sales up about 20% last year. Operating margin is now 9.8% compared to 7.1% in 2016. I'll try to wrap this up, because I know you guys got to do yours. But here's why it will keep outperforming going forward. You still got tons of momentum with same-day fulfillment and owned brands. Department stores and mall-based retailers, you think of the Gap, Macy's, they're pretty weak, they're still giving away market share. I think Target is going to grab that with its e-commerce interface and its unique owned brand strategy which incentivize visits to the store.

It's also opening small-footprint stores. This is something that Walmart can't do. They're not doing that. Costco, obviously isn't their business model, so it's something that makes the company really unique and is a growth opportunity there. I think they've become Amazon-proof, too, with the same-day fulfillment. They also don't have a marketplace, so all their business is first-party sales, which I think has helped build some brand trust that Amazon has struggled with with some of their third-party stuff. Then strong brand partnerships, there's Ulta, which is opening shop-in-stores. Starbucks has a lot of stores in Target and they do collaborations with a lot of designers and that sort of thing, which is a unique thing to them. So why buy? The stock is still undervalued at a P/E of 17 based on 2021 expected EPS. That's just half the price of S&P 500, so pretty cheap. The stock sold off again in March when it announced another $4 billion annual investment cycle, so I think it's still misunderstood. It's proven its growth strategy. There's still a long runway in e-commerce. I think it's a really unique retailer in that multichannel category. The management team of Brian Cornell, they've proven their mettle. I think it's also great fit whether you're looking for growth, value or dividends. Target could satisfy all of those needs.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Amazon, Starbucks, and Target. The Motley Fool owns shares of and recommends Amazon, Costco Wholesale, Starbucks, and Ulta Beauty. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, short January 2022 $1,940 calls on Amazon, and short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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