Can Target Stock Really Reach $100?

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Although many brick-and-mortar retail stocks have been beaten down as of late, there have actually been a few winners. The industry is bifurcating, with the losers being higher-priced, mall-based retailers, and the winners being off-price retailers and "superstores" that offer a mix of different kinds of products at low prices with good loyalty programs. These "superstore" winners have also been able to develop their digital businesses, holding their own against Amazon and the rise of e-commerce.

Target (NYSE: TGT) is an interesting name in the space, because it seems to be positioned right between these two camps. However, J.P. Morgan retail analyst Christopher Horvers thinks that Target deserves to be put squarely in the "winners" camp after its recent earnings report. That should theoretically lead to expansion of its valuation ratios, which could catapult the stock from $82 today to $100 per share in short order.

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Here's how Target is bucking the recent retail upheaval.

Cornell's transformation

Much of Target's recent success can be attributed to the plan put forth by CEO Brian Cornell two years ago. This included opening smaller urban stores and investing in digital e-commerce (including the 2017 acquisition of Shipt), with the strategy of using Target's large base of stores as distribution centers.

That strategy seems to be paying off. Though these investments cut into margins last year, Target is now achieving the holy grail of strong same-store sales along with margin expansion. Last quarter, same-store sales grew 4.8%, with 4.3% traffic growth, leading to growth in revenue of 5.1% overall. Though gross margin slightly contracted, overall operating income grew a whopping 9% on the back of leveraging SG&A (sales, general, and administrative) and real estate costs.

Target's digital initiatives are also paying off, with a stunning 42% digital comps growth, marking an acceleration over last year's 28% growth. Target has numerous digital initiatives, from Shipt (a same-day delivery service with annual subscriptions), to ordering for in-store pickup, to Drive Up, to regular delivery.

Cornell attributed these successes to making Target's stores the center of digital fulfillment:

All of this, combined with healthy share repurchases, led to an impressive 15% gain in earnings per share. That's a pretty great result for a company some consider to be in the "dying" sector of brick-and-mortar retail. In fact, Target's forward price-to-earnings ratio of just 13.75 means Target's stock trades at a PEG ratio under 1, assuming the company is able to maintain that earnings growth rate. A PEG ratio under 1 is considered to be very cheap.

Potential roadblocks on the way to $100

Of course, it's somewhat unlikely that Target keeps up 15% growth in earnings. Management even guided to a lower growth rate next quarter, as the company laps the Toys R Us bankruptcy from early 2018, which benefited Target considerably. Management even called out the toy category as a particularly bright spot last quarter.

Also, instead of raising annual guidance on the back of the strong quarter, management only reiterated its full-year guidance, which calls for low- to mid-single-digit comparable sales, and earnings per share of $5.75 to $6.05, which ranges from just 4.3% to 9.8% over 2018.

Finally, Target is not immune to the impact of tariffs. Although Target's diverse business lines will help mitigate some of their effects (as some categories will be affected, but others not), the company won't completely escape. Although management said it was able to mitigate the initial 10% tariffs rather well, a 25% tariff on a greater number of goods would likely have a more significant impact.

Eye on the Target

All in all, Target remains a solid stock in these uncertain times, mostly due to its rather low forward P/E -- less than 14 times earnings. The company is executing well, and it should probably be valued closer to the "winner" retailers, such as Walmart or TJX Companies, which trade closer to 20 times forward earnings:

If not for the overhanging tariff fears, I think Target would already be well on its way to $100 per share. But the company still remains a good value stock today.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of AMZN and Target. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool recommends TJX. The Motley Fool has a disclosure policy.