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Buy Target Stock Before Q2 Earnings for Long-Term Growth?

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Target (TGT - Free Report) stock surged 95% in the past year to crush Shopify (SHOP - Free Report) , Amazon (AMZN - Free Report) , Walmart (WMT - Free Report) , its industry, and the market. The retailer is coming off a monster covid-boosted year and a strong first quarter.

TGT is currently trading near fresh records heading into its second quarter financial release on August 18.

One-Stop Shop

Target’s e-commerce growth helped business boom during the heart of the pandemic and its offerings will see it succeed in a retail age where customers want as many options as possible. Last year, its comparable digital sales soared 145%, with same-day services up 235%. These same-day offerings include in-store pickup, Drive Up, and its Instacart-style Shipt unit.

Along with its new-age shopping push, the Minneapolis-based retailer has focused even more heavily on its own in-house brands for fashion, furniture, food, and more. TGT’s various store brands succeed because of its ability to adapt and stay on-trend, while remaining affordable.

Target’s growing slate of in-house brands have helped separate it from rivals like Walmart and Costco (COST - Free Report) within some key demographics. Target's owned-brands grew by 36% in the first quarter of 2021, which executives said was the strongest increase “ever recorded.”

Zacks Investment Research
Image Source: Zacks Investment Research

Other Fundamentals

Target has successfully positioned itself as a one-stop-shopping option as malls fade and smaller retailers are pushed aside. Its 2020 sales soared 20%, having added $15 billion to its top-line that “was greater than its total sales growth over the prior 11 years.” Meanwhile, its adjusted earnings jumped nearly 50%.

Target then crushed our Q1 FY21 estimates, with sales up 23% and digital 50% higher. Wall Street also loves its margins that stand out against many of its big-box peers. For instance, its Q1 operating margin came in at an “unprecedented” 9.8%, up from a “very healthy” 6.4% before the pandemic in FY19. 

Executives expect its full-year operating margin rate could reach 8% “or somewhat higher” to easily top last year’s 7%. The company has been able to grow its margins even with its new-age offerings since it’s not reliant on separate fulfillment centers or warehouses.

Zacks estimates call for its Q2 revenue to jump another 8% and its adjusted earnings to pop 1%. TGT is projected to follow up 2020’s historic expansion with 31% higher adjusted EPS and 9% strong sales in 2021 to see it pull in $102 billion. The company has also topped our bottom-line estimates by an average of 62% in the trailing four quarters, including a 60% Q1 beat.

Investors should also be glad to hear that TGT in early June raised its dividend by 32% to $0.90 a share, with 2021 “on track to be the 50th consecutive year in which Target has increased its annual dividend.” Target’s 1.37% yield tops the S&P 500 and matches the 10-year U.S. Treasury.

The company’s payout is more impressive considering it’s soared over 220% in the past three years. This includes a 50% surge in 2021, even as its industry slipped 9%. Despite its climb, TGT trades at a 15% discount to its own year-long highs and 33% below its industry at 21.5X forward earnings.

Zacks Investment Research
Image Source: Zacks Investment Research

Bottom Line

Target’s consensus earnings estimates surged following its Q1 release, but its recent revisions stagnation helps it land a Zacks Rank #3 (Hold). TGT also sports “B” grades for Value and Momentum in our Style Scores system and an “A” grade for Growth. And 15 of the 19 brokerage recommendations Zacks has for TGT are “Strong Buys,” with none below a “Hold.”

The recent run has pushed Target stock near overbought RSI levels (70) at 64. This could see it face near-term selling pressure if investors take profits and let the stock that’s already soared 95% in the past year possibly cool down a bit. Nonetheless, investors with prolonged horizons shouldn’t necessarily try to time stocks and might want to consider buying Target. 

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