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A large part of the retail industry is in deep trouble. In Canada, the embattled Hudson’s Bay Company is on the brink of following Simpson’s, Eaton’s, and Sears into extinction. In the U.S., major companies like Macy’s, J.C. Penney, Nordstrom, Gap, and Kohl’s all reported weak third-quarter sales. If the holiday season is a bust, watch for announcements of store closures and layoffs in the new year.
It’s not as if people have stopped buying. According to the U.S. Department of Commerce, year-over-year spending growth in the third quarter was a respectable 2.9%. It’s a matter of shifting allegiances. We’ve seen it developing for years: Consumers are abandoning traditional department stores, opting instead for big discounters and online shopping. The beneficiaries of this seismic shift are companies like Costco, Walmart, Target, and Amazon.com.
Costco recently reported net sales of $11.9 billion (figures in U.S. dollars) in October, an increase of 6.8% from $11.2 billion last year. That’s a big jump in this business. Walmart said same store sales were up 3.2% in the third quarter on revenue of $128 billion. Earnings per share beat forecasts and the company expressed optimism about the holiday season.
Then there’s Target Corp. (NYSE: TGT). Remember them? This is the company that blew more than $5 billion in an abortive attempt to enter the Canadian marketplace a few years ago. Its sudden withdrawal in early 2015 left 17,000 people out of work and saddled companies like RioCan REIT with hundreds of thousands of square feet of vacant retail space.
Since that debacle, Target has refocused its attention to its U.S. home base and is doing very well, thank you. Third-quarter results released last week were so good they drove the stock sharply higher. Comparable sales grew 4.5% year-over-year. Over the past two years, they have grown by almost 10%. Digital sales increased 31%, on top of a 48% increase last year.
Rising sales are translating into growing profits. Earnings per share (EPS) from continuing operations were $1.37, up 18.2% from $1.16 last year. Adjusted EPS was $1.36, which was 24.9% higher than the $1.09 reported in the third quarter of 2018.
The outlook going forward is bright. For the fourth quarter, Target expects comparable sales growth of 3%-4%, and adjusted EPS of $1.54 to $1.74. For the full year, the company now expects adjusted EPS of $6.25 to $6.45, compared with the prior forecast of $5.90 to $6.20.
The share price reflects the company’s resurgence. The stock finished 2018 at $66.09. It closed on Friday at $127.22 for a year-to-date gain of 92%. That’s a huge gain for a retailer.
What’s driving Target’s success? Studies have shown that Walmart wins on pricing most of the time (it even beats Amazon.com). But the shopping experience is quite different, and it clearly has an impact on consumers.
Walmart is a big box store and looks it. I find it a place you want to get into and out of as quickly as possible (although that’s not always easy given the long line-ups at checkout). Target, ironically, has more of the feel of a traditional department store with softer lighting, more attractive displays, and more attentive staff. If I have to spend time in a store, I would rather it be Target than Walmart. Based on sales growth, a lot of U.S. consumers feel the same.
Despite the big runup in the share price, I think there is more upside in Target stock. According to The Wall Street Journal, 18 out of 27 analysts who follow the company have a Buy or Overweight rating on it. The average target price is $137.46.
The shares pay a quarterly dividend of $0.66 ($2.64 a year) to yield 2.0% at the current price. I suggest buying a half position at this level. If the shares pull back, add to it. Conservative investors may prefer to put the stock on their watch list and wait to see if it retreats from current highs. As always, talk to your financial advisor before making a final decision.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.
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The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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