Target (TGT 0.76%) and Tanger Factory Outlets (SKT 0.48%) both survived the retail apocalypse that crushed many brick-and-mortar retailers over the past decade. Target's store renovations, private label brands, and e-commerce upgrades kept it relevant against Amazon and Walmart. Tanger's outlet centers continued to attract bargain-seeking shoppers even as traditional malls collapsed.
Target and Tanger also survived the COVID-19 pandemic, which wiped out many struggling retailers. Target's robust online sales carried it through the crisis, while Tanger weathered the storm by suspending its dividend, letting its tenants defer their rent payments, and offering shorter-term leases.
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But over the past 12 months, Target's stock price tumbled 37% as Tanger's stock rose 7%. The S&P 500 declined 16% during the same period. Let's see why Target underperformed Tanger and the market by such a wide margin, and if Tanger can maintain that lead as the bear market drags on.
The key differences between Target and Tanger
Target is a general merchandise retailer that sells apparel, accessories, beauty products, household essentials, home furnishings, electronics, appliances, toys, sporting goods, and groceries. It currently operates 1,938 stores across the U.S.
Target taps those brick-and-mortar stores, which are located within 10 miles of about 75% of the U.S population, to fulfill its online deliveries and in-store pickups. That robust fulfillment network, along with its ongoing e-commerce upgrades, enabled Target to stay ahead of many of its brick-and-mortar rivals while keeping pace with Amazon.
Tanger operates 37 outlet centers across the U.S. and Canada. As a landlord, it collects rent from more than 2,700 tenant stores instead of selling any products of its own. It's also a real estate investment trust (REIT), so it's required to pay out most of its profits to shareholders (usually through dividends) to maintain a favorable tax rate. It suspended its dividend during the pandemic when it started to bleed red ink, but it reinstated those payments at the beginning of 2021 when its bottom line began to stabilize.
Which company is growing faster?
Target's comparable store sales rose 19% in fiscal 2020, which ended in January 2021, as its digital sales surged throughout the pandemic. Its adjusted earnings per share (EPS) jumped 47%. In fiscal 2021, Target's comps grew another 13% -- even against a tough comparison to the pandemic and stimulus-induced shopping -- as its adjusted EPS increased 44%.
But in the first half of 2022, Target's comps growth cooled off to the low single digits as it was hit by the double whammy of inflation and supply chain disruptions. Inflation throttled consumer spending on its discretionary products (especially large products like TVs, kitchen appliances, and outdoor furniture) while boosting its freight and labor costs. Supply chain disruptions also prevented it from stocking up on the right products.
As a result, Target's inventories jumped 36% year over year to $15.3 billion in the second quarter of fiscal 2022. For the full year, analysts expect its revenue to rise just 4% as its ongoing markdowns reduce its adjusted EPS by 41%.
Tanger's revenue fell 18% in 2020 as the consolidated occupancy rate across all its centers dropped 510 basis points to 91.9%. Its core funds from operations (FFO) per share, a key profitability metric for REITs, declined 32%. That slowdown was entirely attributable to the COVID-induced shutdowns. But in 2021, its revenue grew 9%, its occupancy rate rose to 95.3%, and its core FFO improved by 12% as its stores reopened and its rent payments stabilized.
In the first half of 2022, Tanger's revenue increased 6% year over year as its core FFO grew 7%. Its occupancy rate fell to 94.9% at the end of the second quarter, but that still represented a 170-basis-point improvement from a year earlier. Analysts expect its revenue to rise about 1% this year, and for its EPS to increase a whopping 800% as its profitability stabilizes.
Tanger's tenants might face inflation, supply chain, and inventory headwinds on their own. However, Tanger merely needs to focus on keeping its occupancy rates high and collecting the rent. As long as those stores stay in business (or Tanger replaces them with new tenants), it will likely generate more stable growth than Target or other traditional retailers.
The valuations and verdict
Target's stock trades at 14 times forward earnings and pays a forward dividend yield of 2.6%. Tanger has a higher forward price-to-earnings ratio of 22, but it also pays a much higher forward yield of 4.9%.
I still like Target as a long-term investment, but its valuations could remain depressed until it reduces its inventories and stabilizes its margins. Meanwhile, Tanger's simpler business model, the resilience of outlet centers through past economic downturns, and its higher dividend should make it the more appealing stock in this challenging macro environment.
