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Is Target a Top Retail Stock for 2022?

By Neil Patel – Jan 15, 2022 at 9:22AM

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Continued success in the digital channel will support the business in the current year.

The coronavirus pandemic certainly shed light on how quickly consumer behavior can change. Brick-and-mortal retail was already facing substantial headwinds over the past decade or so with the rise of online shopping. But the past two years have just accelerated this ongoing trend. 

Not all physical retail is dead, however, as Target (TGT 2.02%) has proven. The popular general-merchandise chain's trailing 12-month sales of $103.3 billion and net income of $6.8 billion were up 16.6% and 78.9%, respectively, compared to the prior-year period. And the business is embracing digital trends to drive growth.

Let's find out if Target is a top retail stock to own for 2022. 

Person shopping for cosmetics at the store.

Image source: Getty Images.

Solid momentum 

Target has been a surprise pandemic winner as its stores offer shoppers a broad range of items, allowing them to complete an entire shopping trip in one place. Same-store sales, or comps, in the fiscal 2021 third quarter (ended Oct. 30) increased 12.7% year over year. All five of Target's core product categories -- apparel and accessories, beauty and household essentials, food and beverage, hardlines, and home furnishings and decor -- registered double-digit comps growth.

The company has made meaningful investments to bolster its digital capabilities over the years, which is why it was prepared for, and has been thriving, during the pandemic. In 2017, Target announced a $7 billion investment in its omnichannel shopping experience. Prior to that, in 2015, the company hired Mike McNamara as chief information officer to completely revamp Target's IT workforce. Those strategic moves continue to pay huge dividends.

Orders using same-day services (in-store pickup, curbside pickup, and Shipt delivery) rose 60% during the quarter, adding to the 200% growth for this category from the year-ago period. Furthermore, a remarkable 95% of all sales were fulfilled by a store during the quarter, driving efficiencies for the business and allowing individual locations to act as hubs, while customers enjoy reduced wait times and greater inventory availability.

But don't assume the in-person shopping experience is no longer important. Target is sprucing up its stores to encourage customers to visit more often. Partnerships to create shop-in-shops with AppleWalt Disney, and Ulta Beauty freshen up store layouts and benefit Target by supporting higher levels of customer traffic. This only raises the value proposition of shopping at Target.

Management expects a strong holiday shopping season to support high single-digit to low double-digit comps growth in the current quarter. And while broader supply chain and inflationary issues have been a problem, the business is navigating the environment by expanding fulfillment capacity and inventory assortments.

During the latest earnings call, CEO Brian Cornell announced that Target will hire 30,000 supply chain team members. Additionally, he confirmed that absorbing higher merchandising costs to continue providing value to customers will prove to be the right move.

An attractive valuation 

Despite revenue and profits soaring in recent quarters and a stock price that jumped 31% in 2021, Target's shares trade for an attractive price-to-earnings (P/E) ratio of just 16.2 as of this writing. This is significantly cheaper than competitors like Costco and Walmart, which trade at P/E ratios of over 40. Boosting shareholder returns for Target is a generous capital-return policy that includes dividend payments and stock buybacks. 

Will 2022 be another winning year for Target and its shareholders? I think the company's continued momentum in digital and same-day shopping, as well as its outstanding valuation, make it a screaming buy right now.

Neil Patel owns Apple. The Motley Fool owns and recommends Apple, Costco Wholesale, Ulta Beauty, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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