Why Does Wall Street Love Target Stock Again?
After missing Wall Street’s expectations for its fourth quarter earnings earlier in the year, Target (NYSE:TGT) finally saw some respect from Wall Street. Shares of the omnichannel retailer jumped 10% Tuesday after the company reported strong fourth- quarter results. So why does Wall Street love Target stock again?
In the past, the market punished Target for stepping up its investments. Last year, the stock fell because Target increased capital spending, saying it would allocate $4 billion of capital for 2021. In retrospect, that money was well spent, because comparable store sales grew by double digits last year, adjusted earnings per share more than doubled year over year, and despite these challenges, the company is growing fast.
For years, Target’s CEO, Brian Cornell, had worried that investors were too pessimistic about Target’s future; however, Wall Street got angry and decided to cheer on Target as they announced their intention to dramatically scale back capital spending.
1. Taking a balanced approach
It’s hard for companies to achieve both growth and profitability. Currently, several of the hottest stocks are trading at high valuations, but don’t actually generate a profit. With a focus on growth and the absence of a dividend, investors should avoid such companies.
Target is straddling this line as well, and its leadership plan is a good example of how to be competitive and keep a talented workforce over the next decade. Raising minimum wages can make employees more loyal, giving the company a competitive advantage, and a pipeline for new leadership.
The retailing giant is going to more expansion locations which will enable to provide omnichannel services. The number of new locations a year is expected to be thirty. Most of the new stores will be for a smaller format such as Times Square NYC and Charleston New.
Moreover, the retailer is continuing to invest in store remodels and add sorting centers to improve the shopping experience. It is also working to speed up customer fulfillment.
Wall-street says the S&P 500 is worth $106B now; a bit more than $22B if you factor in dividends.
Target is expecting growth in the coming years as it invests in its technology sector, increasing both revenue and operating income. It is planning to raise its dividend, which would reduce shares outstanding by 7% to 30%, to drive further outperformance by investors.
2. A great track record
A lot of people questioned Wall Street about Target’s plans because it made a few major financial errors before Brian Cornell became CEO. This includes botched Canadian expansion plans, pulling out of this country with a massive $5 billion cost, and it even outsourced the e-commerce operation to Amazon for 10 years.
However, Cornell has had positive financial performance during a pandemic, including investing in new markets, buying a grocery chain, and growing its owned-brands and same-day fulfillment.
Target is a business that has clearly distinguished itself from the other retailers with its multi-category approach, a “cheap chic” brand, a diversified store base, their focus on same-day fulfillment, and their ability to earn Wall Street’s trust. Target is also spending money where it sees opportunity.
3. A competitive advantage
Target has also built a reputation for itself by being a major player in various businesses: its grocery chain, the drugstore, electronics, and furniture store, and the clothing retailer. It also has built a strong partnership with big companies like Starbucks, Apple, CVS, and Disney.
The company achieved “same-day fulfillment” by providing services for the orders placed in less than 24 hours. Target has much deeper penetration in urban areas than Walmart and Costco, making it ideally suited for same-day fulfillment services. These “same-day fulfillment” services have been growing by almost five times.
Through out its stores this holiday season, customers have been delighted by the Target’s new same-day program, which saves the company nearly 90% per unit compared to shipping items from a fulfillment center. This has been a key part of the retailer’s ability to turn its traditional $7 billion in annual
4. Good value
Finally, Target’s current low price makes it look like one of the best value stock opportunities on the market. Its low price-to-earnings ratio of only 16 makes the investment a true bargain. Its growth into new and exciting areas, along with long-term earnings targets and dividend growth, make a great investment.
That price may move even higher if analysts revise their valuation for this stock. A clear growth strategy, and the track record for this company makes it a solid investment for the future. Investors shouldn’t overlook this company.
