Peter Lynch suggested that investors buy what they know. If I had followed his advice, I would have bought Target Corporation (NYSE:TGT) a long time ago. Fortunately, I did buy the stock this year, but with the many thousands of dollars I’ve spent in the store, I feel like a fool (and not the Motley Fool kind). Investors take note, you can still be late to the party and make money. I didn’t buy Target because it’s a huge growth story, but because the company offers a compelling combination of growth and income.
It’s Boring
For several years, I deluded myself into avoiding Target Corporation (NYSE:TGT)’s stock because I thought the stock was too boring. I figured if Wal-Mart Stores, Inc. (NYSE:WMT) was bigger, and Amazon.com, Inc. (NASDAQ:AMZN) offered cheaper prices, that there wouldn’t be much left for Target in the middle. In addition, I saw other stores like Kohl’s Corporation (NYSE:KSS) as a competitive threat to Target’s clothing and home goods.
The truth is, all of these companies are competitive threats. However, Target Corporation (NYSE:TGT) has managed to make a very nice living in the middle of these companies. Target doesn’t try to compete exclusively on price, although they will match prices. The company doesn’t try to have more stores than Wal-Mart Stores, Inc. (NYSE:WMT), and they aren’t going to sell as wide of a variation of goods as Amazon.com, Inc. (NASDAQ:AMZN) does. That being said, if you walk in most Target stores, they are busy.
With $10,000 in 2003, you could have acquired about 273 shares (price of $36.63 in May 2003) of Target Corporation (NYSE:TGT). Ten years later, these 273 shares would be worth about $18,976, not to mention you would have collected over $1,900 in dividends during that same time frame. Including dividends, that works out to an annualized return of about 7.5%, and if you reinvested your dividends, the return would have been even higher. Considering the market had one of the worst corrections in 70 years during this time frame, that type of result isn’t boring at all.
What Is Target Doing Right?
First, the company is outperforming its traditional competition when it comes to same-store sales. In the last three months, Kohl’s Corporation (NYSE:KSS) reported same-store sales fell 1.9%, and Wal-Mart Stores, Inc. (NYSE:WMT)’s U.S. division saw a decline of 1.4%. By comparison, Target Corporation (NYSE:TGT)’s decrease of 0.6% doesn’t look that bad. Bad weather, plus a higher social security tax rate hurt sales, and Target held up better than most.
While it’s true that Amazon.com, Inc. (NASDAQ:AMZN) represents a clear threat to Target, over the holidays last year, I found several things Target is doing to battle this online Goliath. Target decided that helping Amazon by selling the Kindle Fire lineup wasn’t a smart move and decided to jettison this product. Target’s strong suit isn’t computers and electronics anyway, so this wasn’t a huge deal. Target Corporation (NYSE:TGT) also is keeping its margins healthy by focusing on what the company does best, namely clothing and home goods. Many customers like to try on clothes before they buy, and home goods are a matter of quality, which you can’t always discern online. Combine these moves with the willingness to match prices, and Amazon is less of a threat than it used to be.
