Target losing to the index

TGT - Target

Target is a general merchandise retailer offering its customers everyday essentials and merchandise at discounted prices.

Nearly all of Target’s revenues are generated within the U.S. The company has more than 1,800 stores in all 50 U.S. states and the District of Columbia and 41 distribution centers. It has 42 own brands and approximately one-third of its 2019 sales came from owned brands. Over the years, Target has established an extensive supply chain and technology and operates a vast network of distribution centers. It operates as a single segment. The company also has digital channels that offer a wide assortment of merchandise. Target has stores within 10 miles of where 75% of the U.S. population lives.

Target offers a wide range of goods to its customers in the beauty & household essentials (27% of 2019 sales), food & beverage (19%), home furnishings & decor (19%), apparel & accessories (19%), and hardlines (16%).

Investment Data

Revenue Growth & Market Exposure

Over the last four decades of its existence, Target has developed a deep understanding of customers’ behaviors and purchasing patterns. The company runs various customer loyalty programs to enhance customer engagement. It seeks to drive customer loyalty and trip frequency through its Target Circle program and offers a 5% discount on nearly all purchases and free shipping at Target.com. It offers a wide assortment of

Target has been investing in elevating the overall customer shopping experience by redesigning and growing its stores network. In the past three years, the company has remodeled more than 700 stores, grown its stores’ network to more than 100 small-format stores in key urban markets, and redesigned its store operating model. Target has introduced over 25 new owned-brands, including the launch of Good & Gather in 2019 which is expected to become its largest owned brand. The company is also expanding its digital fulfillment capabilities including same-day services, in-store pickup, Drive-Up, and Shipt.

In the ongoing crisis scenario, Target is well-positioned to meet the heightened customer demand both at its physical and online stores. The company experienced a rapid increase in traffic and sales in stores and a surge in discretionary categories items sales throughout April. Digital growth topped 200%-300% above last year’s levels. In the first quarter, more than 5 million guests shopped on target.com for the first time. But the company had to incur some incremental operating expenses this quarter as a result of the pandemic on increased wages, higher supply-chain costs, and store cleaning.

Dividends

Target is a Dividend Aristocrat having paid a dividend every quarter in its history as a public company since 1967. The company last raised its dividend by more than 3% and has compounded its dividend growth at 15.8% per annum over the last decade. It has an annual yield of 2.2% currently and a payout ratio of 49%, granting enough room for future expansion. Target returned $2.85 billion to shareholders through dividends and share repurchases in FY2019 and generated over $7 billion in operating cash flow. The company is a safe dividend-paying stock.

The company’s operating cash flow grew nearly $1 billion compared with last year. Capital expenditures decreased in 2019 from the prior year primarily due to project savings in its store remodel program. It is targeting 300 store remodels in 2020 and expects ongoing investment in the current store remodeling, opening additional small-format stores, and strengthening its supply chain in the future. Target has also announced the acquisition of Deliv, a start-up focusing on last-mile delivery technology to boost its delivery services. The company is further positioning itself to meet the growing digital demand as customers chose to shop online. Target continues to gain market share across all of its core merchandise categories.

Target is committed to paying its dividend in the future as well. It also has a share repurchase plan in place. It withdrew its guidance and suspended share buybacks and has put a halt on the store remodeling and new store initiatives in the wake of the pandemic crisis.

Competition

Target competes with traditional and internet retailers, including department stores, off-price general merchandise retailers, wholesale clubs, drug stores, supermarkets, etc. The company competes with the likes of large retailers such as Costco, Walmart, Dollar General, etc. Costco is the world’s second-largest retailer by sales, is a membership warehouse club providing branded merchandise at the low prices to its members. Walmart is the world’s largest retailer serving over 265 million customers each week. On the digital front, Target faces intense competition from Amazon.com which has disrupted the whole brick and mortar retailing business. But Target’s same-day fulfillment services including in-store pickups and home deliveries have supported its online growth and paced the digital momentum.

Bottom Line

Every company is striving hard to navigate through the uncertainty in these difficult times. Target is run by a seasoned management team that should see it through the crisis. Target is estimating investments in enhancing its capabilities to translate into tangible financial results in the near future. Focus on digital delivery, a growing base of loyal customers and owned-brand potential positions Target well for future growth once the COVID-19 threat begins to fade.

TGT vs Indexes - 2020

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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