Sales have boomed for Target (TGT 1.03%) over the last couple of years. The company was an unintended beneficiary of forced closures of non-essential businesses and has kept the momentum going.
Interestingly, the stock has faced some pressure of late and is down 19% off its high reached late in 2021. In connection with its excellent operating performance, the sell-off has earned Target a place at the top of my list of stocks to buy. What follows is a closer look at what is attracting me to Target.
Image source: Getty Images.
Target's fulfillment services are wildly popular
Target has done an excellent job turning its brick-and-mortar stores into a competitive advantage. The company operates nearly 2,000 stores in the U.S., and it is near a large percentage of the population. Over the years, shoppers have shifted more of their spending online. That's hurt many retailers that have not adapted well. Target finally found a great formula -- maximize the convenience of your locations.
Shoppers no longer have to go inside a Target, search their aisles, and wait in line to pay. Target's enhanced fulfillment options allow customers to place an order on their phones and pick it up at their local Target within hours. For consumers who don't want to get out of their cars, Target will deliver an order right to their vehicle. As fast as Amazon has gotten on Prime delivery, it cannot match the speed that Target has developed in most cases.
Target's same-day services surged by 235% in 2020 and 45% on top of that in 2021. Customers value the convenience and effectiveness of the options. In response, management is expanding the program, adding Starbucks orders, returns, and more in 2022. These types of sales are lucrative for Target, too. If a customer is picking up an online order in a Target parking lot, that's an order Target does not have to pay to ship. Simultaneously, that's one customer who does not need a cashier to make a payment. Of course, Target still needs to pay someone to bring the orders to the car.
The benefit from the boom in digital sales fulfilled by same-day services can be observed in Target's record operating profit margin in the fiscal year ended Jan. 29 of 8.4%. Target's previous high in the last decade was 7.6% in 2013.
Since dividends are paid out of profits, the rising margins should help sustain dividend growth. Target's payout ratio was a solid 22% most recently, highlighting plenty of room to expand the payment without sacrificing sustainability.
Inexpensive valuation
TGT PE Ratio and P/FCF ratio data by YCharts.
Target is trading at a considerably lower price to earnings and price to free cash flow than its brick-and-mortar rivals, Costco and Walmart. The discount to its peers is near the widest it has been in the last decade. The low price is another reason I put Target on the top of my list. I would not purchase a stock solely because of its low cost. The bargain value combined with its excellent prospects might make Target the next stock I buy.
