Target: A 2024 buy opportunity

[Kingran]

Year	2019	2020	2021	2022	2023
Net Profit	2,894	3,269	4,368	6,946	2,780
Outstanding Shares	518	504	501	471	460

Year end is Jan , i.e., 2019 is Jan-2019

I think bulk of merchandising issues (i.e., not having the products due to supply chain issues and consumer behavior changed due to COVID resulting in wrong inventory) are mostly behind. I am not saying consumer behavior is going to go back to pre-COVID level, but many retailers are slowly waking up to the change in behavior. The margin impact due to the above will also normalize.

Target has to find a solution for shop-lifting crime. This is a serious concern for shoppers to go into Target. At least for someone like me, I just avoid going to Target even though there are some items I would like to buy from there. This reduces traffic and money lost in theft (industry term shrink).

Of course the recession is perennially 6 months away, and that could hurt them in sales, margin, and store branded card losses. And could impact the earnings. How much, I don’t know. Currently, analysts’ Earning estimates for 2024, 2025 are $7.5, $9. The first 2 Qtr of 2024 are $2.06, $1.81, so the 2024 targets are more achievable. Now 2025 earnings assume margins get better. But conservatively we can assume $7 to $8 EPS. The dividend is $4.4 and yield is 3.97%

The stock is long way down from 2021 high of $260 to $111

For now, I am on the sidelines. I have sold Jan 2024 $110 put, Jan 2025 $100 put, $60 put. This lets me keep an eye on the stock, earn some premium, and if assigned will take the shares. OF course Jan $110 I will most likely roll it further out or further out and down or may even close if we get a strong year-end rally.

I have closed my Jan 2020 (pre-covid) position on May 2022, i.e., while I made over 40% gains, but completely missed taking profits at $260. There are many such stories… So the lesson is (right or wrong) take profits when your gut tells you.

In general, post year-end, after January, I want to go into Feb 2024 with only my long-term positions, deep in the money covered calls and deep in the money sold puts. Keeping significant dry powder.

[Goofyhoofy]

@Kingran

Target has to find a solution for shop-lifting crime. This is a serious concern for shoppers to go into Target. At least for someone like me, I just avoid going to Target even though there are some items I would like to buy from there.

While there are reports of shoplifting increases across broad media, aided by store closings in a few locales, I suspect the problem is over-reported - even if true.

In 2021 shoplifting losses were reported as 1.4% across major retailers. So far in 2023: 1.6%. The long term average? 1.5%. Hardly indicative of the kinds of headlines we’ve been seeing and hearing about lately.

What has happened is that there have been several “smash and grab” incidents garnering coverage aided by (the relatively new deployment of) video capture of the episodes. What is true is that retailers have expanded into some questionable neighborhoods, and have been reluctant to hire the kinds of store security that such locations might require.

So while not minimizing this “uptick”, neither do I suggest hunkering down in the basement, passing on the opportunity to go to largely safe stores in pursuit of the American dream

Here’s a pretty balanced Barron’s take:

Target's Store Closures Raise Eyebrows. What's Really Going on With Shoplifting?

Local crime statistics can, however, help fill in the big picture of how theft levels have evolved in recent years. A quick sweep of statistics from the cities where Target is closing stores shows that while theft related crimes increased in 2022, they have since started to trend down in some cities. In Manhattan’s [25th Precinct], where Target is closing a store, grand larceny is up 49.1% compared to two years ago, but down 12.5% year-over-year so far in 2023. Larceny theft in [San Francisco] rose by 14.1% in 2022, but has fallen 7.9% year-over-year so far this year.

[Kingran]

@Goofyhoofy

What is true is that retailers have expanded into some questionable neighborhoods, and have been reluctant to hire the kinds of store security that such locations might require.

Walnut Creek, CA (bay area) up-scale mall attacked by gangs of criminals and looted high end shops, same thing in Oakland, SF. These are not shady neighborhoods. Rich people area, I lived in Bay Area for over 20 years, never I have witnessed what is happening. I moved to Seattle, and it is same. My son still lives in Bay Area, routinely his car windows are smashed. It is so bad, he no longer locks his car and rolls the window down. His friend, a kid I know from his middle-school days, got rear-ended, he stopped his car and stepped down, they attacked him and drove away with his car.

Now that we have moved to Seattle, we have to move my son out of our insurance, and we could not find insurance!! Our long-term state farm agent said she is no longer writing car insurance.

The deterioration of law and order is severe in the last few years. The DA’s response is don’t register the case, don’t prosecute, no data. We can feel kumbaya.

I cannot change any laws, cannot even talk about it. Because woke crowd will attack you mercilessly. The only thing that I can do is avoid. I just stick to COSTO and local Kroger. It is frustrating, but I have lost confidence on the law enforcement agencies to protect.

[Kingran]

@Kingran

The margin impact due to the above will also normalize.

Year	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	TTM
Gross Margin	29.53	29.39	29.53	29.68	28.87	29.27	29.76	29.27	29.28	24.64	26.11
Operating Margin	5.29	6.25	6.65	7.15	6	5.45	5.96	6.99	8.44	3.53	4.36
Net Margin	2.72	-2.25	4.56	3.94	4.08	3.9	4.2	4.67	6.55	2.55	3.12

This table above shows the margin for the last 10 year. Under normal operating environment you can expect, the gross margin in 28~29% and net margin 4.x% If they can get to 4.x% net margin that will result in $9 EPS. At 15x, that will be $135. If you can buy at prices below $100, you can wait for couple of years for the net margin to normalize and can enjoy a decent gain.

[Goofyhoofy]

@Kingran

Under normal operating environment you can expect, the gross margin in 28~29% and net margin 4.x% If they can get to 4.x% net margin that will result in $9 EPS. At 15x, that will be $135. If you can buy at prices below $100, you can wait for couple of years for the net margin to normalize and can enjoy a decent gain.

That assumes “normalize”, meanwhile Target is facing other pressures, including on-line. While it’s a sample of two, they have opened stores here in iffy locations, both of which are underpopulated and slow growing. 10 years from now they might be viable, but that’s a long road. (Meanwhile WalMart has closed one because of unprofitability.)

I can’t make any macro prediction how it will play out (Target is one of my favorite stores, BTW). I remember when Department stores were the thing, and suddenly they were killed at the low end by walMart and the high end by malls. And we’ve seen the middle merchandiser squeezed in other situations, and with “shopping” in flux because super low end (Aldi, Dollar Stores, WalMart) and high end, I’d be reluctant to bet on “normalize”. I hope it happens, but there’s just too much fog.

[Kingran]

@Goofyhoofy

I’d be reluctant to bet on “normalize”.

First of all, Target sales are still growing, they have very healthy margin’s, and their on-line business is picking up. It is not one of those old “department stores” that were in death spiral. There is nothing that suggests Target is walking towards that.

By returning to “normal” I meant margins returning to recent past and historical levels.

Separately, an average Walmart store does close to $1 B per annum and Target is almost half of it. So a location that is not viable for Walmart is very viable for Target. I don’t what you mean by ‘iffy’ or why Walmart walked away. I hope Target would have factored that Walmart walked away in their decision making, A typical store costs anywhere from $20 ~$25 M to build.

[Kingran]

@Goofyhoofy

meanwhile Target is facing other pressures

You are the reason I stopped posting in REIT board. Your toxic politics. Take it elsewhere. Fools banned political discussion. Stay out. You are least interested in target as a stock opportunity. Your only beef is I pointed that crime is an issue for Target. There are many places where you can encourage crime. Leave me alone.

[Kingran]

Let us assume target has no growth and can do only 2023 revenue. Still the sales of the first 3 Quarters will equals to 2019 sales and the 4Q sales of $32 B is over and above 2019 level. Why it matters? The stock price is going towards 2019 level and the business has extra $32 B in revenue and 12% less shares.

2019	2020	2021	2022	2023
75,356	78,112	93,561	106,005	109,120

Q3 2023	Q4 2023	Q1 2024	Q2 2024
26,518	31,395	25,322	24,773

[Goofyhoofy]

@Kingran

You are the reason I stopped posting in REIT board. Your toxic politics

Fascinating, because I may have ever posted on the REIT board twice in my life. Maybe more, I don’t know, but REITs have never been a big thing for me.

@Kingran

Fools banned political discussion. Stay out.

I’ve said nothing political here. Not one word.

@Kingran

You are least interested in target as a stock opportunity. Your only beef is I pointed that crime is an issue for Target. There are many places where you can encourage crime. Leave me alone.

Bizarre. I have owned TGT in the past, but do not now. I have owned WMT in the past but do not now. I have owned many retailers off and on as the situation encourages. I am saying Target has several challenges ahead, the least important of which is “political.” Bigger are “on line” and a hollowing out of mid-level retail. Yes, they are continuing to grow in those segments, but not as fast as either above or below. That’s not healthy, which might indicate why the stock has tanked for the last several years and not bounced back as other retails have.

Have a nice day.

[Kingran]

WOW!

[Kingran]

@Kingran

Target has to find a solution for shop-lifting crime. This is a serious concern for shoppers to go into Target.

Everyday Items like toothpaste are locked up. Such a sorry state. Target CEO claims customers are saying thank you for locking these items!!!

Target CEO claims customers are saying 'a big thank you' for locking up...

[Kingran]

hat tip:
https://x.com/wallstengine/status/1793230866925117571

The link is not working so…
Target Q1 '24 Earnings Highlights:

Revenue: $24.14B (Est. $24.13B) ; DOWN -3.1% YoY
Adj. EPS: $2.03 (Est. $2.05) ; DOWN -1% YoY
Comparable sales: DOWN -3.7% (Est. -3.68%)

Q2 Guidance:
Adjusted EPS: $1.95 to $2.35 (Est. $2.19)

Full-Year Guidance:
Adjusted EPS: $8.60 to $9.60 (Est. $9.44)
Continues to expect a 0 to 2 % increase in its comparable sales

Operating Results:
Store only Comp. sales: DOWN -4.8%
Digital comparable sales: UP +1.4%
Same-day services: UP +9%, led by Drive Up (UP +13%)
Gross margin: 27.7% (Est. 27.4%) ; Prev. 26.3%
Operating income: $1.30B (Est. $1.3B) ; DOWN -2.4% YoY
EBITDA: $2.04B (Est. $1.97B) ; UP +1.2% YoY
Operating income margin: 5.3% (Est. 5.34%) ; Prev. 5.2%

Customer transactions: DOWN -1.9%
Average transaction amount: DOWN -1.9%
Inventory: DOWN -7% YoY; higher in-stock levels than a year ago
Stores: 1,963; UP +0.5% YoY

Other Metrics:
SG&A expense: $5.17B (Est. $5.07B) ; UP +2.8% YoY
Net interest expense: $106M (Prev. $147M)
Effective income tax rate: 22.7% (Prev. 21.1%)
Dividends paid: $508M (Prev. $497M)
ROIC: 15.4% (Prev. 11.4%)

CEO Brian Cornell’s Commentary:
“Our topline performance improved for the third consecutive quarter, with growth in our digital business led by strength in our same-day fulfillment services.”
“We’re pleased with early results from the relaunch of Target Circle.”

Growth Officer Christina Hennington’s Commentary:
“We remain cautious in our near-term growth outlook and expect consumer discretionary trends to remain pressured in the short term.”
“Higher interest rates, economic uncertainty, and high credit card balances have consumers concerned.”

Corporate Updates:
Relaunched Target Circle loyalty program, welcoming over 1 million new members in Q1
Investing $3B-$4B in the business in 2024

Strategic Developments:
Focus on enhancing customer experience through lower prices and seasonal assortments
Continued investment in strategy and efficiency initiatives to drive long-term growth

[Goofyhoofy]

@Kingran

hat tip:

Odd, the Wall Street Journal has a decidedly less optimistic tone:

Target Reports Another Sales Drop

Comparable sales fell 3.7%, marking retailer’s fourth straight quarter of declines; shares fall

Later in the column:

The Minneapolis retailer said Wednesday that it expects comparable sales for the current quarter to come in flat to up 2%, which would be the first upward movement in over a year. Target has struggled to grow as shoppers pull back on discretionary spending to deal with elevated prices for everyday necessities.

Shares were down nearly 8% in pre-market trading Wednesday.

Some competitors such as [Walmart], [Amazon.com] and [Costco] have reported strong quarterly sales of late, with shoppers drawn to fast shipping or deals on food and other essentials. Walmart, the country’s largest retailer, said its [U.S. comparable sales rose 3.8%] in the most recent quarter.

https://www.wsj.com/business/earnings/target-tgt-q1-earnings-report-2024-dcaaf0d3

Like I said upthread, Target’s problem is the hollowing out of mid-level retail. The upper end isn’t affected, the lower end is severely affected by inflation; consumers are gravitating lower. All the “green shoots” Target talks about might be nice for someday, but it isn’t today.