Target (TGT) has about 1,850 big box stores in the U.S., which offer general merchandise and food, as well as serving as distribution points for the company’s e-commerce business, notes Ben Reynolds, income expert and editor of Sure Dividend.
Target has a market cap of $63 billion and should produce about $110 billion in total revenue. The company posted first-quarter earnings in May and results were better than expected on both the top and bottom lines. Adjusted earnings-per-share came to $2.05, which was 29 cents better than expected.
Revenue was up fractionally year-over-year to $25.3 billion, beating estimates by $40 million. Traffic was up 0.9% year-over-year, down from 3.9% in the same period a year ago. Comparable sales were up 0.7%, offset by a decline in comparable digital sales.
Target noted it reduced inventory by 16% year-over-year as the company bought less to reduce promotional activity. First quarter gross margin was 26.3% of revenue, which was up from 25.7% a year ago.
Guidance for the year was unchanged at $7.75 to $8.85 in adjusted earnings-per-share, and we’ve set our estimate at $8.35 accordingly. In June, Target increased its quarterly dividend 1.9% to $1.10.
Competitive Advantages & Recession Performance
Target’s competitive advantage comes from its everyday low prices on attractive merchandise in its guest-friendly stores. However, given the price war in the retail sector, Target’s moat faces a decline.
In addition, as consumers tend to curtail their consumption during recessions, the company is vulnerable in such periods. In 2008, its earnings-per-share fell 14%. Nevertheless, that performance was much better than most companies, which saw their earnings collapse during the Great Recession.
Moreover, it took only one year for the Target’s earnings to return to its pre-crisis level. Therefore, while Target is vulnerable to economic downturns, it is much more resilient than most stocks in such periods. Target is combatting this in part with its massive push towards digital sales channels, which is working.
Growth Prospects, Valuation & Catalyst
Target has grown its earnings-per-share at an average annual rate of nearly 13% during the last decade. Due to fierce competition and the failed attempt to expand into Canada, Target’s earnings-per-share remained almost flat from 2012 to 2017.
However, turnaround efforts have borne fruit and as a result, Target has significantly improved its performance in recent quarters. The company has reduced its share count by about 4.8% per year over the last six years, although the pace of buybacks has slowed as its share price has risen.
Overall, we expect 10% annualized growth from what should be a low level for 2023 given margin issues that cropped up in recent quarters. When combined with the 3.3% starting dividend yield and little expected change from the valuation, this implies 12.9% annual returns over the next five years.
