Target Is Winning, Let Your Winners Run
It was only a quarter ago that I wrote the article “Target Is About To Rocket Higher”. My thesis, summed up by the words ‘total package’, centered on the company’s long-term plans, its positioning within the market, COVID-inspired trends, the dividend, and a robust outlook for growth. In the time since, Target (NYSE:TGT) has more than exceeded my expectations.
In terms of the business, Target reported earnings that were far above consensus despite a round of aggressive upgrades from the sell-side community. In terms of the stock, well, I had set a target of “above $130” before the end of the year and it was surpassed two weeks ago.
If you are thinking about taking profits, now that the shares are up another 8% from their all-time high, you may want to think again. It is a good idea to take some money off the table but not too much. Never forget, let your winners win while their winning. It’s the losers you want to cull from your account.
Wow, Target, Wow
There is not one single thing to not like about Target’s report. The company beat on every metric and I will mention again that is despite an optimistic group of analysts. Topline revenue grew a stunning 24.8% on strength in all five of the company’s core merchandise categories. That beats consensus by $2.87 billion or nearly 1400 basis points. The strength is due to a combination of higher ticket counts, +4.6%, compounded by higher ticket averages, +18.8%. At the comp level, comp-store sales grew 24.3% versus the consensus of 7.6%.
The bottom line results are where the report gets really exciting. The company experienced robust margin growth in part because of cost-leveraging related to cost-control measures implemented at the beginning of the pandemic. Margins came in at 10.0% versus the 5.7% expected resulting in strong growth in both adjusted and GAAP earnings. GAAP earnings of $3.35 beat by $1.81 while adjusted earnings of $3.38 beat by $1.74.
One of Target’s many strengths lies in its shift to digital. The company had already embraced omnichannel retail before the pandemic and doubled-down on it in the time since. Now, eCommerce sales are growing at a high triple-digit pace with the 2Q results coming in at 195%. Putting that into perspective, eCommerce accounted for 13% of the total growth across the company’s footprint. If you doubted the need for technology before, Target’s results prove tech is a necessity for business now.
“Same-day services (Order Pick Up, Drive Up and Shipt) grew 273 percent and accounted for approximately 6 percentage points of total Company comparable sales growth.”
Target Returns Capital To Shareholder
Target is one of my personal favorite investments because of its history of dividend increases. The company is a blue-chip Dividend King with 52 years of consecutive increases and a very high expectation of future increases. If anything, the next increase will be more substantial than previous simply due to the fact the company is so well-capitalized, debt is incredibly low, coverage is excellent, and cash-flow is on the rise.
Target is also a share-repurchaser although that program was suspended earlier this year. With the 2Q results in the bag, it looks like the company could resume buy-backs at any time. There is still $4.5 billion left under the old plan, I would not be surprised to see the limit increased when it gets reinstated.
The Technical Outlook: Target Pops, Wait For The Pull Back
Shares of Target went absolutely ballistic this morning after the report was released. Up more than 8.5% in premarket trading, the stock is now trading well above the previous all-time high and forming a substantial price gap. It’s possible the stock could maintain this level and form a consolidation/rally from this point but I would be wary. At these levels and with that gap it’s far more likely we’ll see price action push lower looking for firm support before the rally resumes. My best targets for support are at the bottom of today’s gap near $138 or slightly lower near $130.
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