Don’t Target This Stock

TrackStar is pretty impressive abilities when it comes to picking up on financial pros’ stock research trends that others might miss? 

Well, recently, it pulled our attention to Target (TGT) when search volume surged on June 1st. This was quite peculiar since Target’s earnings had already been released the week prior. 

We couldn’t help but wonder why there was such a sudden interest in Target, especially considering that the stock has gone down by 16.6% this year and more than 50% since the end of 2021 – a significant move for a stock of this magnitude. 

So, we delved into the news and data to investigate if something had changed that we might have missed. 

Target’s Business

From the northern headquarters of Minneapolis, Minnesota, Target Corporation is one of the largest discount retailers in the United States, with a presence in all 50 states and the District of Columbia. 

It operates nearly 2,000 stores that offer a wide range of products, from groceries and essentials to clothing and electronics. Plus, it owns Shipt, a same-day delivery service, and Roundel, a media company.

Target is known for its unique assortment of owned and exclusive brands, such as Good & Gather, Cat & Jack, Opalhouse, and Hearth & Hand with Magnolia. It also partners with leading national brands and collaborates with celebrities and designers to create exclusive collections.

Surprisingly, the company’s sales are pretty evenly spread amongst the different categories:

Source: Target 2022 Annual Report

The company owns three stores:

• Target: The largest and most profitable, accounting for more than 90% of the company’s revenue and operating income in 20202. 
• Mervyn’s: Moderately-priced department stores that sell apparel, accessories, shoes and home goods. 
• Marshall Field’s: Traditional department stores that sell upscale apparel, accessories, cosmetics and home furnishings4.

Target’s stock is down a whopping +50% since 2021.

According to Wall Street analysts, some of the reasons for the stock’s weakness are:

• Competition from other retailers, especially online players like Amazon and Walmart that are investing heavily in e-commerce and delivery capabilities
• Supply chain disruptions caused by the global pandemic, labor shortages, port congestion, and rising transportation costs have affected Target’s inventory levels and margins
• Inflation pressures have increased the cost of goods and services for both Target and its customers, potentially impacting its sales and profitability

Early in the pandemic, Target struggled to keep up with demand. Now, it is stuffed with inventory, forcing it to markdown stock, hurting its profitability.

Financials

Source: Stock Analysis

While Target’s managed to keep revenues moving in the right direction, it’s margins have declined substantially.

Gross margins dropped 5%, practically obliterating its free cash flow.

At the moment, its operating cash flow is almost entirely eaten up by CAPEX, which is going to store remodels, new locations, building upstream inventory replenishment capacity, and ramping up its sortation center strategy.

That’s meant no share buybacks last quarter, though management plans to keep its dividend in place.

Target does carry a decent amount of debt at $18.9 billion. However, interest expenses are only $500 million which is quite low.

Valuation

Source: Seeking Alpha

Compared to its peers, Target valued right in the middle.

While it runs the cheapest price-to-cash flow ratio, its P/E ratio is just above Dollar General (DG), but below the others.

Target does boast the lowest price-to-sales ratio, which is interesting given its ‘upscale’ brand.

Overall, it’s cheap, but not as cheap as we’d like to see given the headwinds.

Growth

Source: Seeking Alpha

Target’s growth has been abysmal compared to its peers in recent years.

Only when you look out 3-5 years does it become respectable.

But on a forward basis, it’s forecast to have the lowest revenue and EBITDA growth in its group.

Profitability

Source: Seeking Alpha

Costco (COST) has one of the lowest gross margins. However, it’s SG&A are typically lower, giving it an EBIT margin on par with most of its peers.

Notably, COST, Dollar Tree (DLTR), and Walmart (WMT) all boast positive free cash flow. TGT and DG do not.

Our Opinion 4/10

Shares of Target may be half what they were, but they still aren’t cheap enough.

Consumer defensive stocks as a whole are expensive. Target’s the worst of the bunch…right now.

We expect its investments will eventually pay off. But that will likely take well into 2025.

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