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Bull of the Day: Target (TGT)

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The market continually surged to new highs in December and that momentum carried over into 2021. Cyclical industries, as well as green energy stocks and other areas that have gotten the Biden bump, jumped last week on the back of the Democratic sweep in Georgia. Retail behemoth Target (TGT - Free Report) doesn’t necessarily fit exactly into this mold, but it has surged to new records all the same to start the year.

Big Retail Keeps Getting Bigger…

Target is not nearly as big as its peers Walmart (WMT - Free Report) , Costco (COST - Free Report) , and Amazon (AMZN - Free Report) in terms of annual revenue. But the Minneapolis-based retailer is projected to pull in $91 billion in 2020 and has continued to impress Wall Street through its successful e-commerce advancements, margin growth, and more.   

TGT’s same-day offerings feature in-store pickup, Drive Up, and its subscription-style Shipt unit. These various options have helped Target shine during the coronavirus and more importantly, position itself for continued success. The retailer’s third quarter sales surged 21%, which marked its second-straight quarter of over 20% revenue growth (25% in Q2).

More specifically, its digital comps skyrockted155%, with in-store comparable sales up 10%. The ability to grow its e-commerce unit while expanding its brick-and-mortar business remains vital since e-commerce accounted for roughly 14% of total U.S. retail sales in Q3, down from a record 16% in Q2.

The overall figure was up significantly from 11% in the year-ago period. Yet, the digital commerce frenzy and the constant news stories might have made some people assume that e-commerce plays a far larger role already.












Built to Win

Target has attracted loyal customers through on-trend and affordable fashion, home décor, furniture, food, and more. This has helped it stand out from rivals such as Walmart within some key demographic groups. TGT has also done countless partnerships with designers on fashion and furniture over the years and more recently landed deals with brands like Levi Strauss that were once staples at department stores.

As department stores such as Macy’s (M - Free Report) continue to struggle to adapt to an age where people shop on their smartphones and buy from upstart brands directly on Instagram (FB - Free Report) , Target has positioned itself for long-term growth. TGT’s flagship grocery brand, Good & Gather, has also performed well since its launch in September 2019.

What Else

Target has improved its margins during the coronavirus, as it continues to outperform Walmart and Amazon. In fact, the retailer’s Q3 operating income margin climbed to 8.5%, up from 5.4% in the year-ago period. TGT stock has also crushed WMT over the last 12 months, up 60% vs. 28%, and it is neck and neck with AMZN. The nearby chart shows that this run extended over the past three years as well, with TGT up nearly 160%.

The company’s overall performance has been boosted by recent strength, with the stock up 65% in the past six months and 17% in the last month alone. TGT popped again on Monday to reach another all-time high of nearly $200 per share.

Despite the climb, Target trades at a discount, as it has for years, to its industry and its peer group that includes Costco, Dollar General (DG - Free Report) , TJX (TJX - Free Report) , and others, at 22.9X forward 12-month earnings vs. 25.6X. This also comes in below Walmart’s 25.4X.

Alongside its impressive run over the last several years, Target’s 1.4% dividend yield roughly matches Walmart and easily beats the recently rising 10-year U.S. Treasury note’s 1.1%.












Bottom Line

Zacks estimates call for TGT’s fourth quarter revenue to climb 12.2% to $26.27 billion, which is projected to help lift its bottom-line by 23% to $2.08 a share. The retailer’s adjusted fiscal 2020 EPS is expected to soar 37% on nearly 17% higher sales. This would mark by far its strongest sales expansion in at least the past 20 years to top 2007’s 13% and crush recent years of around 3.5%.

Target’s strong upward earnings revisions trends help it land a Zacks Rank #1 (Strong Buy) right now. The company is projected to see its top and bottom lines pull back ever so slightly in 2021, as it might be nearly impossible to recreate last year’s conditions.

That said, investors should pay close attention to its Q4 release, as shopping habits are likely to stay in place for a long time, as big retail continues to crush its smaller competitors. It’s also worth noting that its Retail-Discount space sits in the top 15% of our over 250 Zacks industries. Plus, 12 out of the 18 brokerage recommendations Zacks has for Target come in at a “Strong Buy” right now.

Clearly, there could be some near-term selling pressure given Target’s surge. Nonetheless, longer-term investors might want to consider adding TGT as a retail titan that’s poised to thrive.

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