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.
In fact, in the last quarter, Target’s gross margin of 30.79% was second only to Kohl’s Corporation (NYSE:KSS) at 36.39%. While Wal-Mart Stores, Inc. (NYSE:WMT) fights with Amazon for lower margin sales, these companies can keep their 24.66% and 26.15% margins respectively. The fact that at this point nearly 80% of Target’s locations offer either an “expanded grocery selection” or are SuperTarget locations, makes the company’s gross margin even more impressive.
Why Buy Now?
Target Corporation (NYSE:TGT) finally took a step that it seemed like never would happen. The company is expanding outside of the U.S. into Canada. While this was talked about all last year, and the company is still feeling the short-term pain of this investment, longer-term this is great news.
The company’s willingness to step into Canada means this country will now have access to the cheap-chic of Target stores. I firmly believe the Target shopping experience of less crowded aisles than Wal-Mart Stores, Inc. (NYSE:WMT), and less sales to navigate than Kohl’s, will do well internationally. The expected passage of a bill to tax Internet sales should help level the playing field dramatically when it comes to Amazon.
Amazon.com, Inc. (NASDAQ:AMZN)’s torrid growth is already slowing down. The company’s general merchandise sales growth slowed from 40% last year, to 30% this year. In addition, Amazon’s digital sales aren’t growing as expected, with sales growth slowing from 19% last year to 10% today. The truth is, Amazon is more of a traditional retailer than they were last year.
A second reason to consider Target Corporation (NYSE:TGT) today is, the company’s stock looks like a decent value. Analysts expect earnings growth of 11.63%, and the shares yield over 2%. When you combine this with a P/E ratio of less than 16, the shares look reasonably valued. Relatively speaking, Kohl’s offers a higher yield, but can’t match Target’s expected growth rate. Walmart’s dividend yield is even less than Kohl’s, and again, the company isn’t growing as fast as Target. When it comes to Amazon, the company is expected to grow earnings by 37%, but at nearly 200 times this year’s projected earnings, the stock is far too expensive for my taste.
Target’s expansion into Canada should drive future growth, and moving into the summer, sales should pick up compared to the first quarter. With a good combination of growth and income, this company’s red logo could mean green for investors.
Chad Henage owns shares of Target. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Aiming For Green originally appeared on Fool.com and is written by Chad Henage.
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