With all the recent Amazon Whole Foods hoopla... are there some bargains to Target in the sector?
Key Stats for Target Corporation
| Ticker | TGT |
|---|---|
| Sector | Other Discount Stores |
| Latest price | $52.61 |
| Value | $29,025M |
| Daily vol | $589M |
| Date | 19 June 2017 |
| Links | Yahoo Finance, SEC Edgar, target.com |
1. What's their aim?
Target Corporation is a general merchandise retailer selling products through both its 1,800 stores and online. Its general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items and are 96% of sales. Online is just 4%, though it did grow at +25% last year, so clearly their online strategy is working nicely.
TGT has its owned brands include Archer Farms, Market Pantry, Sutton & Dodge, Art Class, Merona, Threshold, Ava & Viv, Pillowfort, Room Essentials, Wine Cube, Cat & Jack, Simply Balanced and Wondershop. And it even has "exclusive brands" from partners include C9 by Champion, Hand Made Modern, Mossimo, DENIZEN from Levi's, Nate Berkus for Target, Fieldcrest, Kid Made Modern, Genuine Kids from OshKosh and Liz Lange for Target. Personally, I ain't sure what the value of the own-brand are! Any ideas?
And if you've been in a Target recently, you'll probably have noticed that they don't run their pharmacies any more. They sold the whole business to CVS in late 2015 for $2bn.
Looking at the numbers:
You can clearly see the impact of the CVS deal at the top line, with sales off $5bn.
But ignoring the pharmacies, the core business ain't great either:
Comparable sales decreased 0.5 percent, reflecting a 0.8 percent decrease in traffic.
So the traditional business was under pressure and it shows at the bottom line. Yes, jettisoning the pharmacies has improved gross and net margins, but it didn't get to the bottom line in 2016.
| Fiscal | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue | $73bn | $71bn | $73bn | $74bn | $69bn |
| EPS | $4.52 | $3.07 | -$2.56 | $5.31 | $4.70 |
And what does TGT do with it's cashflow? Here, we can smile. There's a reasonably generous dividend, expected to be $2.36 a share this year. Plus they like buybacks, to the tune of $4bn last year.
All this is possible, with a pretty sensible capital structure, as their $10bn of net debt is just 1.4x the latest operating profit. Now that's the sort of low leverage that some of their peers much envy!
ROIC?
And it may be an aside, but it's really nice to see a management team talk about "returns on invested capital" in their annual report. Wonk alert! This shows if a company has been investing wisely, earning a return above the cost of capital. If yes, great, let them invest more. If not, thumbs down, to management.
At TGT, they are earning a ROIC of 15% per annum, which is really good ... but the figure is declining. Was 16% last year. :( So not a bed of roses.
3. Better hits elsewhere?
So everyone's talking Amazon/ Whole Foods... but did you know that it's Target and Dollar General that have the tastiest margin? Their returns are top of the class too. You have to quit general retailing and head to Home Depot to get more impressive margins and returns!
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Target Corporation | $69,317M | 10% | 23% |
| Amazon.com, Inc. | $142,573M | 9% | 14% |
| Whole Foods Market, Inc. | $15,855M | 8% | 12% |
| Wal-Mart Stores Inc | $487,511M | 7% | 18% |
| CVS Health Corp | $178,825M | 7% | 15% |
| Walgreens Boots Alliance Inc | $116,081M | 7% | 14% |
| Costco Wholesale Corporation | $123,285M | 4% | 24% |
| Alimentation Couche Tard Inc (USA) | $35,679M | 6% | 22% |
| Koninklijke Ahold Delhaize NV (ADR) | $60,235M | 7% | 9% |
| Kroger Co | $111,383M | 3% | 33% |
| Dollar General Corp. | $22,331M | 11% | 23% |
But despite that nice picture operationally, the valuation isn't high. You've got to look at their "friend" CVS or the recent train-crash, $KR to get to a similar valuation. Even their dividend looks peachy at nearly 5%.
Valuation
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| TGT | $29,025M | 12x | -4% | 5% | 21% |
| AMZN.O | $472,101M | 148x | 23% | 0% | 2% |
| WFM.O | $13,639M | 33x | 1% | 1% | 8% |
| WMT | $228,094M | 17x | 6% | 3% | 13% |
| CVS | $78,508M | 13x | 8% | 3% | 12% |
| WBA.O | $84,790M | 16x | 14% | 2% | 9% |
| COST.O | $73,293M | 29x | 10% | 1% | 6% |
| ANCUF.PK | $26,883M | 21x | 13% | 1% | 7% |
| ADRNY.PK | $23,843M | 13x | 7% | 4% | 16% |
| KR | $20,342M | 11x | 4% | 2% | 0% |
| DG | $19,229M | 16x | 8% | 1% | 10% |
So there must be a catch right?
3. Who's thinking what?
Let's start with the professionals on Wall Street! They have a $59.77 target price, i.e. 14% above today's price...but their recommendation to clients is Hold. Though let's remember they've been steadily cutting their target for 6 months... it used to be $77.
And the market's confidence has been under pressure. 12x forecast earnings is a low for TGT, having traded as high as 18x in the last 2 years... but that was back when the stock was expected to grow earnings in the double digits, when now it's not expected to grow at all, long term.
Though perhaps, we are near a bottom? Dividends are still expected to grow, and both revenues and earnings seem to have stabilized.
| Fiscal | 2016A | 2017E | 2018E |
|---|---|---|---|
| Revenue | $69.5bn | $69.4bn | $69.5bn |
| EPS | $4.70 | $4.24 | -$4.20 |
| DPS | $2.36 | $2.44 | n/a |
Is it worth a shot?
Well, reading their latest earnings transcript, I got worried.
We understand that we are in the midst of very challenging period in retail and we're in the early stages of our plans to transform our business.
They are clearly investing for the long-term, recognize the need to transform their mix of sales towards digital, and they know some of their less financially stable competitors are mucking up the market through discounting, etc prior to going bankrupt! Sure the dividend is high and they are committed to returning cash to shareholders. But is that enough?
Sounds ugly. But isn't that in the price? This isn't the first time TGT's taken an extended beating. Is the current bear attack overdone?
I really like this stock... but, as they said at results
At our financial community meeting, in February, we outlined our multi-year plan to position Target to deliver consistent growth, market share gains and outstanding financial performance over the long-term. This plan includes capital investments of more than $7 billion over the next three years, focused on continued investments in technology and our supply chain to build a smart network; a network that leverages all of our store and distribution assets to serve our guests more quickly and flexibly in every channel.
It's a massive investment, and it sounds like 3 years of pain. I can't see the news flow turning in 1 quarter. Though maybe I have to dip my toe in now. Early...
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Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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Author notes: u/shane_stockflare is a Chartered Financial Analyst.
Submitted June 19, 2017 at 03:39PM by shane_stockflare http://ift.tt/2rwSGOZ
