September was a rough month for the market, but apparently nobody told Target NYSE: TGT investors; the retailer closed out the month on a five-session winning streak, setting all-time highs this week.
We’ve been
singing Target’s praises for a while and if you took our advice, it
paid off handsomely after the company released Q2 earnings.
But is it too late now?
I don’t think so – I still see upside in Target shares. The company announced its plans for Q4 this week, which involve a lot of deals and head-to-head competition with Amazon NASDAQ: AMZN. Based on the company’s recent performance, I expect these initiatives to help lead Target to a blockbuster Q4.
Target Deal Days Set for Same Days as Prime Day
Target Deal Days are now set for October 13 and 14 – the same days as Amazon’s Prime Day shopping event. The Target Deal Days will more than double the number of digital deals available last year.
Customers will be able to choose between Target’s contactless Drive Up and Order Pickup, as well as same-day delivery via Shipt. Customers can, with no membership, get their orders in as little as one hour.
Omnichannel success has been a top priority for Target since before the pandemic started, and the company has done an excellent job, particularly in Q2 2020.
Target’s same-day services saw comp growth of over 270% yoy in Q2, with Drive Up growing 734% and Shipt jumping 350%. In-store pickup is nothing new for Target – it has been available for more than five years – but it still grew more than 60% in Q2.
How does Target do it?
Store-based fulfillment. On the Q2 earnings call, CEO Brian Cornell said, “You find that our stores actually drove more than 90% of our second-quarter growth given that they enabled more than three-quarters of our digital sales and an even higher percentage of our digital growth.”
Cornell went on to explain that a big reason the store-fulfillment model is successful is “our merchandising approach, which is based on curation, both in our stores and online assortments.”
A Mistake to Compete Directly with Amazon?
Possibly. But it’s not going to make or break Target.
And if Target is able to cut into some of Amazon’s business? Then we’ll know - the company is really onto something.
What will be interesting to see is just how important super-fast delivery is to customers. Is same-day delivery – sometimes an hour – that important?
Again, whatever happens, Target will be just fine and will remain on an excellent long-term trajectory.
A Long Holiday for Target Shoppers
Target is planning to offer Black Friday deals for the entire month of November for the first time.
Furthermore, Target is extending its Price Match Guarantee for the holiday season; from November 1 through December 24, customers will be able to call on it. The Price Match Guarantee allows customers to get a price adjustment if an item is offered for a lower price at Target or Target.com.
The company will also match select competitors’ prices, but only within 14 days of a purchase, as opposed to the entire holiday season.
Target Sports a Reasonable Valuation
Q2 was a great all-around quarter for Target, with both top-line and bottom-line growth blowing away expectations.
The future outlook is bright, but shares are still trading at just 21.8x forward earnings and .89x forward sales.
Target is unlikely to see 20%+ annualized growth over the next 3-5 years. But its revenue and earnings growth over the past three yearscombined with its stellar performance since the onset of the pandemic make high-single-digit to low-double-digit annualized growth a strong possibility. If that happens, Target’s current share price will look like a bargain.
On top of that, if you add Target to your portfolio, you get a dividend king. Target has raised its dividend every year since 1968. The 1.69% yield isn’t going to make you rich, but you can bank on it increasing in the coming years, perhaps by a good amount.
Bottom line, you can sleep easy if you pick up some Target shares. The company is a nice risk/reward at current levels with a high floor and decent upside.
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