Prior to reporting earnings results last week, shares of discount retailer Target Corporation (TGT, Financial) were almost 26% off of their 52-week high. Then came the earnings release, and the stock rallied almost 10% in a single trading session as the company showed growth in nearly every area of its business.
Even so, Target’s stock is trading with a very reasonable valuation in my view. Let’s look closer at the company and its quarter to see why I believe Target, which is also a member of the Dividend Kings, isn't too overvalued even after recent gains.
Quarterly highlights
Target reported fourth-quarter and full-year 2021 earnings results on March 1. Revenue of $31 billion was a 9.4% improvement from the prior year, but missed Wall Street analysts’ estimates by $376 million. Adjusted earnings per share of $3.19 compared very favorably to $2.67 in the prior year and was 35 cents above expectations.
For the year, revenue grew more than 13% to $106 billion. Adjusted earnings per share of $13.56 was up significantly from $9.42 in 2020.
Comparable sales in the quarter and year were up 8.9% and 12.7%, respectively. These rates are even more impressive when placed on top of the unprecedented gains seen during the Covid-19 pandemic. Comparable sales were up 20.5% in Q4 of the prior year and 19.3% for 2020, giving Target a two-year stack rate of 29.4% for the quarter and 32% for the year.
In addition, store traffic also improved. Foot traffic increased 8.1% in the quarter and 12.3% for the year. Both of these figures also came on top of last year’s strong results, giving foot traffic a two-year stack rate of 14.6% for the quarter and 16% for the year.
Target saw strength throughout the store as all five product categories were up double-digit figures following good showings in 2020.
Like many retailers, Target did face some challenges related to supply chains and employee compensation. Fourth-quarter gross margins were down 110 basis points to 25.7%. Still, Target has now produced two great years in a row even with these headwinds.
The company will host an investor day later this month and provide guidance then. Wall Street expects Target to earn $14.58 per share this year.
Takeaways
Target’s adjusted earnings per share have more than doubled while sales have increased more than 35% since 2019. The company has realized bottom-line growth despite (or perhaps because of) heavy investment in employees and inventory. These investments are clearly paying off. Comparable sales and foot traffic are both higher by double-digit amounts, meaning more people are shopping at Target while also spending more - the growth isn't just due to inflation.
The vast majority of sales, more than 95%, are completed at physical stores. Same-day service continues to ride the pandemic wave as these businesses, which include Drive Up, Shipt and Order Pickup, grew 45% in 2021, which was on top of 235% growth in 2020.
Target’s own brands are resonating with customers as well, as these products totaled sales of $30 billion last year, an 18% improvement. The company brought to stores four new brands during the year, which is likely to add to these totals.
The company’s digital business also continues to pay off as this channel was higher by 21% during the quarter, which was on the heels of a 145% gain in 2020. In total, Target has added more than $27 billion in sales since 2019. Of this, $13 billion has been due to its digital business. This was a small component of operations just a few years ago, but has now added nearly half of new sales over the last two years.
And despite the company’s strong performance since the beginning of the pandemic and higher costs, leadership continues to expect high growth rates going forward.
Beyond 2022, Target is expected to leverage customer loyalty and its product offerings in the form of mid-single-digit revenue growth and high single-digit growth for adjusted earnings per share. Analysts’ earnings estimates for the current year show that those covering the company also expect high single-digit earnings growth.
Valuation
Target ended the trading week at close to $224, implying a forward price-earnings ratio of 15.3. This is identical to the stock’s 10-year average multiple according to Value Line.
Turning to the GuruFocus Value chart, we see that the stock still appears to be slightly ahead of itself.
With a GF Value of $201.15, Target has a price-to-GF-Value ratio of 1.11, earning the stock a rating of modestly overvalued.
Final thoughts
Target’s run of high growth continues as the company has only improved its positioning as a leading retailer since the start of the pandemic. The company also doesn’t show any signs of slowing down as comparable sales in the fourth quarter and full year improved by a meaningful amount from the previous periods.
The business model has shifted since the start of 2020, with digital becoming a much more important piece of the company. Almost half of new sales over the last two years have come from the digital channel, showing how important this channel has become and will be in the future.
Target now has created multiple ways for customers to shop its stores, leading to strong results for the overall company. Leadership has presented long-term expectations that show that the company is likely to continue to see its business grow at solid rates.
The valuation for shares matches the long-term average, and the stock isn’t too far off its GF Value either, suggesting that Target isn’t all that much overvalued for a company that is firing on all cylinders.
