Sell ​​Stock Market: Buy Target Now

targeting‘s (TGT -0.26%) The stock is down about 30% this year as investors worry about slowing retailer growth, lower operating margins, and rising inventory levels. The broad market sell-off — driven by inflation, rising interest rates, and other macro headwinds — has exacerbated that pain.

However, I think the selling has created a good buying opportunity for investors who can tune in to the noise in the near term. Let’s take a fresh look at Target’s key business strategies, growth rates, earnings, and valuations to see why it’s still a compelling buy in this bear market.

Target store in Richmond, Virginia.

Image source: target.

How Target became a retail survivor

A decade ago, Target struggled to keep up Amazon And the Walmart In a crowded retail space. But in 2014, Brian Cornell took over as Target’s CEO and focused on revamping its stores, expanding its own brands, strengthening its e-commerce ecosystem, offering more delivery options, and leveraging its existing network of brick-and-mortar stores. To fulfill its online requests. It has also opened smaller stores to densely populated urban areas.

Cornell’s tactics breathed new life into old retail stores, and comparable-store sales growth accelerated throughout the pandemic in fiscal year 2020 (which ended in January 2021). During the pandemic, more shoppers flocked to Target’s e-commerce site and physical stores to stock up on household products and groceries, and growth continued even as the shutdown tailwind waned in fiscal 2021.

a period

Fiscal Year 2018

fiscal year 2019

fiscal year 2020

fiscal year 2021

Comparable store sales growth

5%

3.4%

19.3%

12.7%

revenue growth

3.6%

3.7%

19.8%

13.3%

Data source: target. Scheme by the author.

Target also continued to open new stores as other retailers closed their weaker locations. Between the end of fiscal year 2018 and fiscal year 2021, Target’s total number of stores increased from 1,844 to 1,926 locations.

Expand margins and increase profits

Target’s gross margin has also stabilized above 28% over the past several years, and its operating margins have continually expanded as it fulfills more orders online through its physical locations. It now generates more than 95% of its total sales – both online and offline – through its stores.

a period

Fiscal Year 2018

fiscal year 2019

fiscal year 2020

fiscal year 2021

gross profit margin

28.4%

28.9%

28.4%

28.3%

Operating margin

5.5%

6%

7%

8.4%

EPS growth rate

15.1%

18.4%

47.4%

44%

Data source: target. Scheme by the author. EPS = earnings per share.

Expanded operating margins enabled Target to achieve double-digit profit growth. These dividends ensured that it continues to pay its annual dividend – which was recently raised for the 51st year in a row, and retains its position as a king of profits of the S&P 500. It currently pays a forward dividend yield of 2.6%, well above Walmart’s forward yield of 1.7%.

So why did investors abandon Target this year?

Target’s stable growth, consistent earnings, and high earnings seem to make it a good defensive stock for a bear market. But for fiscal year 2022, Target only expects its revenue to grow in low-to-medium single digits as it completely weathers tailwinds from stimulus checks and pandemic shopping. Analysts expect its revenue to rise less than 4% for the full year.

This sudden slowdown caused Target to end up with a very large inventory — especially in larger products like kitchen appliances, televisions, and outdoor furniture — by the end of the first quarter of 2022. As a result, it now needs to reduce those inventories with extensive write-downs. to crush the margin.

These price cuts, along with higher supply chain costs and wages, caused Target’s operating margin to drop to 5.3% in the first quarter of 2022. It expects this pressure to reduce its full-year operating margin to around 6%, while analysts expect To be completed – lower adjusted earnings for the year by 36%.

Target expects its operating margins to stabilize in the second half of the year as it gradually draws down its stocks, but its bleak near-term outlook has prompted many investors to head for exits.

Why investors shouldn’t give up on the target

Target clearly miscalculated the impact of the post-stimulus slowdown, but its core business remains intact. Target Circle’s loyalty program has grown from 35 million members in 2019 to more than 100 million members today, and continues to expand same-day delivery and pick-up services. Target’s in-store partnerships with Ulta Beauty And the Disney It also brings more shoppers to its stores, and its digital sales continue to rise.

Analysts expect Target’s revenue and adjusted earnings per share to grow 4% and 42%, respectively, in 2023. We should take these estimates with caution because the current overall headwinds are unpredictable. But Target has traditionally been a resilient retailer throughout recessions and inflationary cycles — because it constantly attracts bargain-hunting shoppers with its low prices.

Based on this forecast, target trades are made with only 17 times forward earnings. By comparison, Walmart trades at 23 times forward earnings. Target’s stock isn’t going to take off anytime soon, but I think its low valuation, high returns and promising growth prospects make it a great stock to buy as myopic investors focus only on its near-term challenges.

John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Liu Sun He has positions at Amazon and Walt Disney. Motley Fool has positions at Amazon, Target, Ulta Beauty, and Walmart Inc. and Walt Disney recommends. Motley Fool recommends the following options: long January 2024 calls worth $145 on Walt Disney and short January 2024 calls worth $155 on Walt Disney. Motley Fool has a profile Disclosure Policy.

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