The share price of Target Corp. (TGT, Financial) has remained almost flat over the past two years. The stock, however, is headed back in the upward direction though still down 24% year to date.
The retailer’s sales have fallen more than 5% in 2016 primarily due to fierce competition in both the retail and grocery market. The continuing rise in online sales has aggressively hurt brick-and-mortar sales. In 2015, Target’s chief rival, Wal-Mart (WMT, Financial), faced a similar situation and was severely hurt as its share price collapsed more than 30%.
Wal-Mart, however, has made a comeback and continues inching up at a healthy rate. In contrary, Target is highly profitable and cheap retailer, which had to battle tumbling same store sales, but the retailer recently has been displaying several positive signs of growth.
The stock was boosted from its recent second-quarter guidance revision where the retailer is now guiding above its previous earnings estimate. The company raised its second-quarter guidance keeping in mind the increase in traffic and enhancing sales trends.
Although offline sales continue moving downward at a strong rate, they are not completely dead yet. It looks like the company’s nearly 1,850 stores should keep it in good stead as long as it leverages these offline units. Amazon (AMZN, Financial), Target’s another significant competitor, is well aware there is a place for brick-and-mortar stores in retail space. Amazon holds a leading position in the online sales space, but it is now aggressively trying to gain a strong foothold in the offline sales area.
Amazon recently announced that it plans to acquire Whole Foods Market (WFM, Financial) for $13.7 billion, or $42 a share. In fact, Wal-Mart and Amazon have decided to move forward with acquisitions, but Target is implementing an entirely different strategy. The retailer has decided to invest heavily ($7 billion) in itself over the next three years.
The retailer’s new plan includes rolling out 100 small-format stores, renovating 600 existing stores, lowering prices across the board, capitalizing in the supply chain to boost sales via online and delivery, as well as investing in digital properties. All of these propositions are targeted at battling Amazon and Wal-Mart, as well as the declining sales they have caused at Target.
Target is doubling down on its efforts to distinguish itself with exclusive brands and to be a front-runner in two key categories. The retailer recently said that it also plans to launch three new apparel brands and one new home goods brand in its stores as well as online this fall. These new brands comprise A New Day, Joy Lab, Goodfellow & Co. and Project 62.
This rebranding effort unquestionably stems from the retailer’s miserable performance in the last six months and is expecting to replicate the success it has had with its Cat & Jack kids apparel brand, which it launched in 2016. The retailer’s new branding strategy is combined with its in-store efforts to make consumers’ experiences more meaningful and worthwhile.
On the other hand, Target is a dividend aristocrat, having raised its dividend yearly for 46 consecutive years. The retailer currently offers a high forward dividend yield of 4.52% which looks very appealing. Most significantly, its payout ratio now sits at nearly 50%, suggesting it still has plenty of room to grow its dividend in the forthcoming years.
Summing Up
Online sales continue growing at a healthy rate, meaning Target is being forced to reinvent itself. Target plans to launch 12 exclusive brands throughout the next two years, of which four brands it will launch this fall. The retailer, however, sees lower margins going forward as it aims to keep its prices competitive.
Target also has a strong balance sheet that will support its new growth initiatives going forward. Also, it will allow the company to keep its stunning dividend growth streak alive. Further, the stock currently trades at a price-earnings ratio of approximately 11, suggesting it is undervalued.
As a result, shareholders should consider buying the stock at this week's market price, as it is down nearly 31% from its 52-week high.
Disclosure: No position in the stocks mentioned in this article.
