Saturday, April 1, 2017

The curious case of Target

In the current environment, Target (TGT) is one of the equities in my portfolio that i am really concerned about, it is also one stock that keeps tempting me to add more to. It is an interesting dilemma.

The market overall is really over valued. This past quarter was one of the best quarters for Nasdaq in the last 3 to 4 years, while the S&P 500 and Dow Jones are both near all time highs. In this kind of environment, semi-long term investors like me keep looking for good dividend stocks on sale. Target with its nearly 50 year strong dividend history, almost 4.5% dividend yield and its ubiquitous presence throughout the US, is a stock showing up near the top of almost all stock screeners.

I purchased the stock in the high 50 range a couple of years ago when the credit data breach and the botched Canadian expansion effort, affected public sentiment and gave us (what i thought back then at least) the opportunity of a lifetime to pick up a solid stock at a great sale price. It did seem that way for a few months, as the stock reached a high of about $84, and was at one point one of my best performing stocks. Yet, here we are today with the stock back in that original range, with the potential to slide further (the most recent earnings report was bad, and they also gave a mediocre guidance).

Even if we look past their execution issues, what really concerns me about them is their competition. Amazon, sells everything you can buy at target and in most cases is cheaper. More than the price difference, it is the convenience of ordering from home and getting the shipment at your door step, sometimes in a few hours on the same day is what gives amazon that extra edge every time. Walmart, which is probably a more traditional competitor has upped their game in recent times. Their stores seem less cluttered, they have invested in their grocery section and it shows, invested a lot in their online operations, now provide free 2 day shipping for orders over $35. For a lot of items, they still provide the best value and are cheaper than even amazon. They are serious about growth and staying relevant - which is evident from their purchase of, and more recently two smaller but popular online stores - and They are investing in technology, and also doubling down on their core strength - providing great value.

On the other hand, there are a few things still working for Target. Their stores are pleasant to go shop in, they have great year round deals on stuff like diapers. In addition, i think their own generic brand (up and up) is of really good quality, specially for diapers and wipes. They have in store mini restaurants like starbucks and pizza hut, and have a deal with cvs for in store pharmacies. All these can surely drive up foot traffic, but at the end of the day it really comes down to how competitive they will be specially when faced with intense competition from amazon, walmart and even Costco.

I don't think they are going away anytime soon, i am holding on to my investment and will keep collecting dividends, in fact i might nibble a bit more if the stock price is in the $50 range, but this might require close monitoring. If you told me 10 years ago that kmart and sears would be fighting for survival, stores like Macy's and JC Penny would be shutting down hundreds of stores to cut costs, i would not have believed you, similarly target being a long term solid bet is far from a given.

What are your thoughts? Is target a good investment at these levels, will it continue to raise and send out solid dividends?


  1. Retail is in an odd spot right now. The valuations are decent compared to the overall market but the sentiment just isn't there and I'm not sure when that will change. I can see target just languishing in the 40-50 range for years while their turnaround effort gets off the ground. I don't see the same upside that may be seen in the market but the same downside(that is if the market continues to grow, target will trail it and if it falls, target will fall just as much). If that's the case then why would I want to keep my money in Target. The 4% dividend is great but if it's a 4% or less total return and the market is growing at 7% then who cares.

    The only place in retail worth investing is Amazon as they have the online area locked up. Walmart is expanding into there but what is Target doing? They're investing money but online is still a small % of their overall pie and any money diverted there is probably a net loss in margin for Target as people are less likely to buy high margin items than when walking around the stores.

    Management has proven they're not all that amazing with the credit breaches, the bathroom "controversy" and the massive failure that was the Canada expansion so why trust them with this turnaround effort? It may work out but who knows. I'd rather have my money elsewhere.

    1. Nice analysis. I agree with every point you mentioned.

  2. Thanks for reading. I hear you on amazon, but they seem to be really over valued at this point. In terms of the upside for target, as we have seen before - if they can show some real turnaround, the market is more than happy to reward the stock. Like i said, it is a tricky call at this point :)