Target thinks its stock is cheap: Q3 results show why

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Like a clock Target (NYSE: TGT) delivered another rock solid earnings report on Wednesday morning.

In the third quarter, comparable sales jumped 12.7%, a two-year comparison of 36%. Performance was strong across the board, with in-store compositions up 9.7% and digital sales up 29%, easily overtaking their peers like Amazon and Walmart in the growth of electronic commerce. Comparable sales also increased by double-digit percentages across all five product categories, showing strong demand across the company.

Overall, net sales rose 13.2% to $ 25.3 billion, beating estimates at $ 24.8 billion. And adjusted earnings per share fell from $ 2.79 to $ 3.03, ahead of the consensus at $ 2.83.

Image source: target.

Target was also not immune to supply chain challenges impacting the global economy, as margins squeezed due to rising costs of goods and freight, among other reasons. . And that seems to explain why the stock price fell before the stock market.

Target’s gross margin increased from 30.6% to 28% and operating margin from 8.5% to 7.8%. However, management raised its guidance for the fourth quarter nonetheless, calling for high single-digit to low-double-digit comparable sales growth, up from a previous forecast of single-digit growth. For the year as a whole, he continues to expect an operating margin of at least 8%.

Activate share buybacks

What stood out most about the earnings report was not Target’s strong execution. Third Quarter Report Pursues Pattern of Double-Digit Percentage Sales Growth and Improved Initiatives Like Same-Day Order Fulfillment Services, Small-Format Store Expansion, and Brand Partnerships like Lego, Disney, and Apple.

What emerges is that management is now aggressively buying back its own shares. Target announced a $ 15 billion share buyback in August, and management wasted no time in implementing it. The company repurchased $ 2.2 billion of shares in the third quarter at an average price of $ 246.80, withdrawing 8.8 million shares, or nearly 2% of its outstanding shares.

In the past, management has explained its intention to return excess cash to shareholders after investing in the company and funding its dividend, so investors should continue to reap the benefits of the share buyback program.

A clear windfall

Over the past few years, Target has proven itself as a premier retailer. The company has a unique approach to multi-category retailing, an industry with only a handful of competitors like Amazon, Walmart and Costco. Unlike its peers, Target has cultivated a “cheap chic” image, partnering with designers and developing 10 own brands that each generate at least $ 1 billion in annual sales.

The company has also eschewed the e-commerce market model, instead focusing on direct sales and in-store fulfillment. This has allowed it to regularly gain market share from competitors like Amazon and Walmart which offer marketplaces. And Target’s in-store fulfillment strategy ensures those sales generate significantly higher margins, as Target avoids the shipping costs most ecommerce businesses need.

Finally, its small format stores are a key part of its growth strategy and separate it from its closest peers, which only operate big box stores or sell online. Small-format stores work well with its in-store execution and will help Target grow its customer base in high-density areas like underserved urban neighborhoods and college towns.

Target’s aggressive share buybacks are a clear expression of management’s confidence in its long-term growth strategy and cash flow, as well as its belief that the stock is undervalued. With a price-to-earnings ratio of around 20, it’s easy to see why.

Target stock prices fell 4% in pre-market trading on Wednesday after the results were released, another sign the company continues to be misunderstood. While it’s easy to squeeze retail inventory for declining margins, Target is doing what it needs to ensure adequate inventory before the holiday season, and sacrificing short-term profits for market share gains. in the long run – smart trading.

The company ended the quarter with inventories up $ 2.2 billion, or 18% from a year ago, putting it in a strong position as the peak buying season approaches.

Target is poised for a strong fourth quarter, but analysts expect earnings per share growth to be flat next year at $ 13.05. Given the company’s momentum during the pandemic and its aggressive share buybacks, this seems like an easy target to beat for the company.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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