Chance to buy one of the world's largest retailers cheaply

by Rodney Hobson from interactive investor |

After a temporary technical hitch, this highly resilient company should soon shake off the blip. 

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

So much was going so well for discount retailer Target Corp (NYSE:TGT), one of the largest American retailers and one with a loyal customer base. Sales continued to rise, the online performance was going from strength to strength and the shares looked like breaking to a new high. 

Then disaster struck at the weekend, the worst time for anything to go wrong at a retailer.  Cash registers in the stores crashed for two hours on Saturday, although purchases could still be made online. 

Next day payment processor NCR had technical issues at one of its data centres. As a result, Target again couldn't process credit-card payments at some stores for about 90 minutes. Both issues have been resolved and there appears to have been no breach of security, but the debacle could well have cost the chain $100 million in revenue if some customers have been driven away permanently. 

Not surprisingly, the shares fell back at the start of the week – but that could be a buying opportunity for investors who believe that this highly resilient company will soon shake off the blip.  

Source: interactive investor  Past performance is not guide to future performance

Target is a one-stop discount department store with sales split fairly evenly across food and drink; clothing and accessories; home furnishing and décor; beauty; plus a wide-ranging division that includes sports equipment, electronics and jewellery. This spread provides a hedge against a downturn in any particular department, so it is no surprise that the group has a strong record of rising profits and dividends.

Times have often admittedly been tough. Five to six years ago Target was really struggling and some commentators feared it would go into long-term decline. However, it recovered by moving with the times, embracing the twin strategy of clicks and bricks. 

It invested heavily into speeding up the delivery of digital sales by making the service more efficient. At the same time it refurbished stores, turning some into showrooms and fulfilment centres to help the digital surge, and switching others into more economical small format stores. Loyalty rewards have been enhanced successfully to boost sales and persuade customers to keep coming back.

These changes had been accomplished – until this weekend - without any major troubles, and they have brought increased revenue based on selling more rather than raising prices. 

There are, it must be said, continuing pressures on margins as Target meets the cost of developing its logistics while facing pressure to increase wages. Retailing in the US, as in Britain, is highly competitive so it is difficult to pass costs on to the consumer through higher prices.

That pressure was shown in fourth quarter figures. Although revenue held steady at $22.7 billion, with gains in market share for all five parts of the business, earnings were down from just over $1 billion to $800 million, although that was in line with expectations. 

Target expects figures for 2019 to show a low- to mid-single-digit increase in comparable sales, with earnings of up to $6 a share.

Dividends are paid quarterly. They have increased every year since 1971, even rising during the struggles of 2013-14. The total payment for the current year is forecast at $2.66 a share, which should be covered at least twice.

The shares hit a peak of $89 in September, but slumped for no obvious reason to $61 at Christmas before recovering most of the lost ground. There was a similar alarming plunge in the first half of 2017, so shareholders have to be prepared to ride out the short-term scares. 

At around $86.50 now, the price-earnings (PE) ratio is an easily achievable 15.5 and you get a decent prospective yield just over 3%.

Hobson's choice: Buy up to $90. If you are a particularly cautious investor you could hold off for now and hope that the shares fall back further, but you may miss your chance.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

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