November 21, 2018

Breakingviews: Target deserves as much investor love as Walmart

by Breakingviews.

Target deserves as much investor love as Walmart. Owners of the Minneapolis-based retailer sent shares down as much as 11 percent on Tuesday morning after the retailer missed estimates by a hair. Yet online revenue soared, and same-store sales held their own. Giving Target the cold shoulder makes little sense.

The company known for its bull’s-eye logo said more people were buying paper towels, sheets and detergent at comparable outlets during the third quarter than they were a year ago. Also encouraging was a nearly 50 percent lift in e-commerce sales. Overall that boosted the top line by 5.6 percent to $18 billion.

Target did miss the mark on some key metrics. Its gross margin fell a tad to 28.7 percent because of higher costs and price cuts. It also had almost a fifth more inventory sitting on shelves – but there’s a decent explanation: Target reckons a bumper holiday season lies ahead so it has stocked up. That’s especially the case for toys, as the company hopes to lure customers who used to shop at Toys R Us, which went into liquidation in March. It’s also offering free two-day shipping during the season to help compete with Amazon’s Prime service.

None of this, though, justifies either the stock drop on Tuesday or shareholders’ longer-term love affair with rival Walmart. Until a couple of years ago the two used to command similar earnings multiples; Target even edged ahead at times. They have since diverged – Walmart now trades at 20 times the next 12 months’ earnings, compared to Target’s 14 times, according to Refinitiv.

Granted, Walmart is far larger and has more heft and pricing power. And it has used deals to grow, buying Jet.com in the United States and India’s Flipkart. Target has taken a less bombastic approach choosing mostly to develop its online strategy in-house. Chief Executive Brian Cornell even cautioned a few years ago that it would take some time to refine. But both companies are doing well. And having physical stores has helped: using these as pickup points for goods customers buy on the web and on apps is boosting their online sales.

Yet Target beats Walmart hands down on performance with a pre-tax profit margin for its January-end financial year of 5 percent. The Bentonville, Arkansas-based behemoth is forecast to be less than half that at just 2.2 percent. Shareholders are missing the Target.

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