Target | (NYSE: TGT)
QVI Research Report | Updated Coverage | July 2023
Summary
Target is the Millennials generation’s favorite place to shop when offline. Of course, Target shoppers also buy online, albeit from their local store’s inventory.
QVI added the stock to the Expanded Portfolio in 2019 for its high-quality business model, compelling value proposition, and discounted stock price.
Following a 100+% run-up since inception, beating the S&P by 4,333 bps, Target seems to have come down to earth in the endemic.
Here is why QVI is downgrading the shares in this updated research report.
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Target Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Target Corporation TGT 0.00%↑ is a dividend-paying large-cap stock in the consumer staples sector’s merchandise retail industry. TGT was added to the QVI Expanded Portfolio on February 13, 2019, at a dividend- and split-adjusted $65.73 a share.
Target Corporation operates as a general merchandise retailer in the United States.
The company offers apparel for women, men, boys, girls, toddlers, infants, and newborns; jewelry, accessories, and shoes; beauty and personal care; baby gear, cleaning, paper products, and pet supplies. It also provides dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, and food service; electronics, which includes video game hardware and software, toys, entertainment, sporting goods, and luggage; and furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards, and party supplies, and other seasonal merchandise.
In addition, the company sells merchandise through periodic design and creative partnerships, shop-in-shop experiences, and in-store amenities. Further, it sells its products through its stores; and digital channels, including Target.com.
Target Corporation was incorporated in 1902 and is headquartered in Minneapolis, Minnesota, USA.
QVI’s value proposition elevator pitch for Target:
The Millennial generation’s favorite place to shop when offline. Of course, Target shoppers also buy online, albeit from their local store’s inventory. Nevertheless, the Bullseye is a comfort zone for the rare millennial on-ground shopping spree.
Performance vs. Sector and Market
The chart below illustrates TGT’s performance against the Consumer Staples Select Sector SPDR® Fund ETF (NYSE: XLP) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Target in February 2019.
For example, TGT outperformed its sector and the broader market in total returns during the coverage timeframe, including an uptick during the COVID-19 pandemic.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Target’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Target: Bullish.
TGT Total Return vs. XLP and SPY
Target Corp (TGT) Total Return: +105.17%
Consumer Staples Sel Sec SPDR ETF (XLP) TR: +53.15%
SPDR S&P 500 ETF Trust (SPY) Total Return: +61.84%
Trailing Since February 13, 2019 (as of July 3, 2023)TGT Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
TGT’s earnings yield traded below the QVI targeted floor at 4.35%, as demonstrated in the below chart. In addition, at 0.79%, TGT’s free cash flow yield was well under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that TGT trades at a premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
Target offers a generous forward dividend yield of 3.20%, supported by an otherwise high 70.53% payout ratio, thus indicating a dividend rate with little room for additional annual increases.
TGT yielded 6.69% from an annual payout of $4.40 on a split- and dividend-adjusted cost basis of $65.73 per share on February 13, 2019, the date of QVI’s initial stock coverage. Thus, our yield-on-cost basis was +349 basis points (bps) above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.86% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for TGT was 2.78% or -108 bps below the 10-Year but 3.94% or +8 bps above the Treasury yield when using QVI’s February 2019 yield-on-cost basis.
QVI’s shareholder yields rating for TGT: Neutral.
TGT Shareholder Yields
Target Corp (TGT) Price: $134.86
Target Corp (TGT) Earnings Yield: 4.35%
Target Corp (TGT) Free Cash Flow Yield: 0.79%
Target Corp (TGT) Dividend Yield: 3.20%
One-Year Trailing (as of July 3, 2023)Target Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Target had positive, three-year annualized double-digit revenue growth of 11.79%, outperforming the 8.89% median growth of the consumer staples sector.
Farther down the income statement, Target had a trailing three-year mid-single-digit net profit margin of 4.49%, exceeding the sector’s median net margin of 3.16%.
Returns on Equity and Invested Capital
Target’s management produced a trailing three-year return on equity or ROE of 34.04%, more than doubling the targeted threshold and tripling the sector’s median ROE of 10.17%.
Stock buyback programs often elevate ROE. For example, as of February 2023, Target had $9.7 billion remaining from a board-authorized $15 billion share repurchase program. Nonetheless, the company reported zero buybacks for the quarter ending April 30. Thus, senior executives may view the share price as currently overvalued.
At 16.51%, Target’s three-year return on invested capital, or ROIC, topped the QVI threshold and trounced the sector’s median ROIC of 6.29%, indicating that its senior executives are superior capital allocators.
In addition, Target’s ROIC almost doubled its weighted average cost of capital, or WACC, of 8.94%. (Source of WACC: GuruFocus).
With double-digit revenue growth, sector-competitive net profit margin, and robust returns on equity and capital, Target’s management continues its stellar 2nd-level performance in Minneapolis.
QVI’s fundamentals rating for Target: Bullish.
TGT Returns on Management
Target Corp (TGT) Revenue (3y Growth): 11.79%
Target Corp (TGT) Profit Margin (3y Median): 4.49%
Target Corp (TGT) ROE (3y Median): 34.04%
Target Corp (TGT) ROIC (3y Median): 16.51%
Three-Year Trailing (as of July 3, 2023)TGT Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Target Corporation (TGT), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial position through direct ownership of any stock mentioned in this report. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
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David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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