Why Financial Pros Can’t Stop Staring at Target

Target (TGT) was a core holding for most investment portfolios…

That is until the pandemic left the company with bloated inventory.

If that wasn’t bad enough, organized theft plagued so many stores the company began to shut down a few locations.

Yet, shares soared 20% off the latest earnings report, despite revenues down 4.2% in Q3.

Shares trade at greater discounts than they have in years.

But has Target finally found the turnaround it’s been looking for?

Target’s Business

Minneapolis-based Target is seen as an upscale all-in-one retailer, similar to Walmart.

They’re a big hit with millennials and college students looking for ways to catch the latest trends in fashion and home goods without spending too much.

Yet, the once disciplined company suffered numerous self-inflicted wounds.

Inventories expanded just as consumer purchases fell off, leaving Target’s warehouses full of out-of-season merchandise it was forced to discount to offload.

Management rolled out a plan in February aimed at improving the customer experience.

So far, it hasn’t borne any fruit.

Source: Target Q3 ‘23 Investor Relations

The inventory challenges were a huge problem the company finally tackled.

Now, it needs to revitalize its brands and image, becoming the trendy place to shop once more. Their partnerships with leading designs cashed in on the home renovation trends for over a decade.

They need to be smart and begin integrating social media and influencers into their marketing strategy.

Financials

Source: Stock Analysis

The pandemic initially boosted Target’s revenues. However, demand for physical products waned in 2022, just as the company took delivery of significant amounts of inventory. Total inventory levels exploded by over 35% in Q2, 2022.

Thankfully, they’ve been able to cut them by 16%-17% in each of the last two quarters.

You can see this directly impacting their gross margins which translated to lower profits and cash flow.

In fact, operating cash flow in 2022 was less than half of the $8.6 billion in put up in 2021. The good news is the rolling 12-month period is back above $8.7 billion in operating cash flow.

However, Capex is up to $5.2 billion from $3.5 billion before the pandemic, leaving just enough to cover the $2.0 billion in dividends and pay down a bit of their $19.4 billion in debt.

Valuation

Source: Seeking Alpha

Relatively speaking, Target is cheap compared to Costco (COST) or WalMart (WMT) on a price-to-earnings basis.

But on a price-to-cash flow basis, it’s cheaper than all the other stores including Dollar General (DG) and Dollar Tree (DLTR).

That’s nothing to sneeze at, but won’t mean much if the company keeps shedding sales.

Growth

Source: Seeking Alpha

It’s no surprise Target is dead last in many growth categories.

The forward revenue growth outlook of just 0.27% is worrisome, especially given the company’s heavy capital expenditures.

If they’re spending money to improve the customer experience, shouldn’t that translate into at least some sales growth?

Profitability

Source: Seeking Alpha

Despite a terrible year in 2022, Target’s managed to keep its net income margin above many of its competitors. However, it’s not the best in class that it once was.

Notably, the low return on assets emphasizes the company’s need to find growth beyond its traditional store footprints.

Our Opinion 6/10

We’re caught between a rock and hard place.

On the one hand, we believe Target’s stock is near a bottom. It’s finally shed the inventory holding back profitability.

However, there isn’t a clear growth plan in place. Plus, the entire discount retail industry is under a lot of selling pressure.

While this might be a good place to start dabbling in shares, we feel this stock may be dead money for another 12-18 months as they work to right the ship.