Target Off to Solid Start in 2019, Outpaces S&P 500 & Industry

Target Corporation TGT started this year off on an impressive note, maintaining the momentum so far. Of late, this general merchandise retailer has been one of the most talked about stocks in Wall Street courtesy of strong holiday sales amid ultra-competitive retail environment.

This Minneapolis, MN-based company is off to a solid start rising roughly 9.6% compared with the S&P 500’s and the Zacks Retail-Discount industry’s growth of 6.4% and 6.6%, respectively, so far in the year.

Here’s Why Target Make the Headlines

Target emerged strong during the holiday season joining the bandwagon of retailers — Five Below FIVE, American Eagle Outfitters AEO and Ollie's Bargain Outlet Holdings OLLI — which also witnessed impressive sales.

The company registered a jump of 5.7% in comparable sales during the festive season compared with 3.4% growth recorded in the year-ago period. Markedly, comps grew across all five key merchandise categories, with Toys, Baby and Seasonal Gift products witnessing exceptional growth. Management expects fourth-quarter fiscal 2018 comparable sales to increase approximately 5%.

But can Target offer investors better upside in the days ahead? Will it be prudent for investors with a long-term plans to stay invested in this Zacks Rank #3 (Hold) stock? You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Here’s a Short Analysis

Sound Fundamentals

Retail is no more restricted to brick-&-mortar and the scenario has drastically changed with the advancement of technology and digital transformation which have altered consumer shopping pattern. In fact, Target has taken steps that have improved prospects in a big way. The company’s initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores to generate higher sales productivity bode well. These are going to play a major role in 2019.

It has also rolled out Target Restock program that enables customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge. Further, in order to improve supply chain and expand delivery capabilities, the company had acquired Grand Junction.

Earlier, Target teamed up with popular online grocery delivery service Instacart to capture the booming online grocery delivery market. Further, the company made significant headway in the same-day delivery race by acquiring Internet-based grocery delivery service Shipt to provide same-day delivery of more than 55,000 groceries, essentials, home, electronics, toys and other products.

Drive Up, an app-based service, is another initiative to facilitate the shopping process. The service allows customers to place orders using the Target app and have them delivered to their cars. Notably, Store Pickup plus Drive Up soared more than 60% year over year, and formed nearly 25% of Target’s digital sales during the November-December period.

Valuation Perspective

A brief glance at some valuation metrics seems to indicate that Target has enough room to run in bourses. Further a Value Score of A also indicates the same.

Target with a price to sales ratio of 0.5 compared with that of industry’s 1.2 indicate that the stock has enough upside potential. The stock also looks attractive with respect to a forward price-to-earnings (P/E) multiple of 13.4x versus industry’s 20.3x. A more-or-less similar picture emerges when comparing EV/EBITDA ratios. Target holds the edge here with an EV/EBITDA ratio of 7.7 lower than 14.9 for the industry.

Bottom Line

The prospects of the players in the industry are closely tied to the purchasing power of consumers. A robust job market and higher disposable income are working in favor of industry participants. Further, the strategy to sell products at discounted prices has helped companies in the space to expand their customer base.

Zacks' Top 10 Stocks for 2019

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