A large part of the retail industry is in deep trouble. In Canada, Hudson’s Bay Co. is struggling. Simpsons, Eaton’s and Sears are already extinct.
In the United States, major companies such as Macy’s Inc., J.C. Penney Co. Inc., Nordstrom Inc., Gap Inc. and Kohl’s Corp. all reported weak third-quarter sales. If the holiday season is a bust, watch for announcements of store closings and layoffs in the new year.
It’s not as if people have stopped buying. According to the U.S. Department of Commerce, year-over-year spending growth in the third quarter was a respectable 2.9 per cent. It’s a matter of shifting allegiances. We’ve seen it developing for years: Consumers are abandoning traditional department stores, opting instead for big discounters and online shopping.
The beneficiaries of this seismic shift are companies such as Costco Wholesale Corp., Walmart Inc., Target Corp. and Amazon.com Inc.
Costco recently reported net sales of US$11.9-billion in October, an increase of 6.8 per cent from US$11.2-billion last year. That’s a big jump in this business.
Walmart said same-store sales were up 3.2 per cent in the third quarter on revenue of US$128-billion. Earnings per share beat forecasts and the company expressed optimism about the holiday season.
Then there’s Target. Remember them?
This is the company that blew more than US$5-billion in an abortive attempt to enter the Canadian marketplace a few years ago. Its sudden withdrawal in early 2015 left 17,000 people out of work and saddled companies such as RioCan Real Estate Investment Trust with hundreds of thousands of square feet of vacant retail space.
Since that debacle, Target has refocused its attention to its U.S. home base and is doing very well, thank you. Third-quarter results released last week were so good they drove the stock sharply higher. Comparable sales, including both stores and digital, grew 4.5 per cent year-over-year. Over the past two years, sales have grown by almost 10 per cent. Digital sales alone increased 31 per cent in the third quarter, on top of a 48-per-cent increase last year.
Rising sales are translating into growing profits. Earnings per share (EPS) from continuing operations were US$1.37, up 18.2 per cent from US$1.16 last year.
The outlook going forward is bright. For the fourth quarter, Target expects comparable sales growth of 3 per cent to 4 per cent, and adjusted EPS of US$1.54 to US$1.74. For the full year, the company now expects adjusted EPS of US$6.25 to US$6.45, compared with the prior forecast of US$5.90 to US$6.20.
The share price reflects the company’s resurgence. The stock, which trades on New York under the symbol TGT, finished 2018 at US$66.09. It closed on Monday at US$125.19 for a year-to-date gain of 89.4 per cent. That’s a huge gain for a retailer.
What’s driving Target’s success? Studies have shown that Walmart wins on pricing most of the time (it even beats Amazon). But the shopping experience is quite different, and it clearly has an impact on consumers.
Walmart is a big-box store and looks it. I find it a place you want to get into and out of as quickly as possible (although that’s not always easy given the long lineups at check-out). Target, ironically, has more of the feel of a traditional department store with softer lighting, more attractive displays and more attentive staff. If I have to spend time in a store, I would rather it be Target than Walmart. Based on sales growth, a lot of U.S. consumers feel the same.
Despite the big run-up in the share price, I think there is more upside in Target stock. According to The Wall Street Journal, 18 out of 27 analysts who follow the company have a buy or overweight rating on it. The average target price is US$137.46.
The shares pay a quarterly dividend of 66 US cents (US$2.64 a year) to yield 2.1 per cent at the current price.
The stock has pulled back a little after a big jump following the release of results.
I suggest buying a half position at this level. If the shares pull back more, add to it. Conservative investors may prefer to put the stock on their watch list and wait to see whether it retreats from current highs.
As always, talk to your financial adviser before making a final decision.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape