Has the Incredibly Shrinking Target Turned Around?

That poster child for the retail apocalypse Target (NYSE: TGT) is suddenly and surprisingly showing signs of turning around. The discount icon’s revenues have started to grow again, in defiance of retail trends.

After months of dropping, Target’s revenues suddenly displayed a small but noticeable increase of $26 million during Second Quarter 2017. That does not make up for the $4.23 billion revenue drop between July 2015 and April 2017, but it is an improvement.

For the record, Target posted revenues of $73.55 billion in July 2015, $71.60 billion in July 2016, $69.32 billion in April 2017 and $69.58 billion. It looks as if Target’s revenue struggles are over but is it really turning around?

Is Target Really Turning Around?

That depends on how you define turn around; because some of Target’s other numbers are still really good for a retailer in today’s dismal brick and mortar environment.

Highlights of Target’s recent performance include:

  • A net income of $2.778 billion on July 31, 2017. This down slightly from $2.768 billion in April 2017, and a noticeable drop from $3.287 billion in July 2016.

 

  • A free cash flow of $903 million on July 31, 2017.

 

  • A profit margin of 4.09% on July 31, 2017.

 

  • Assets of $37.37 billion on July 31, 201.

 

  • Cash and short-term investments of $2.291 billion on July 31, 2017.

  • $6.871 billion in cash from operations on July 31, 2017. This is the one true sign of a turnaround at Target. Cash from operations was $6.492 billion in April 2017 and $4.583 billion July 2016. It looks as if Target is running a lot more money through the till which might make it a value investment.

 

  • A market capitalization of $31.90 billion on September 7, 2017.

 

  • An enterprise value of $41.65 billion on 7 September 2017.

It looks as if Target is generating a lot of float and displaying an impressive capacity to grow its cash flow. That might prove its investment in online infrastructure is paying off. Although I do not believe it is a value investment because Target has not truly demonstrated that it is Amazon (NASDAQ: AMZN) proof or Walmart (NYSE: WMT) proof.

Is Target Really Amazon Proof?

Target; like department stores such as Macy’s (NYSE: M) and JC Penney (NYSE: JCP), is highly vulnerable to Amazon and Walmart.com.

Like those brands, Target relies heavily on middle-class customers in suburban and urban areas and has a strong focus on fashion and apparel. Target’s core demographic is Amazon’s major demographic and Target’s major lines are some of Amazon’s biggest movers.

Target’s vulnerability to Amazon might increase because of the Whole Foods Market (NASDAQ: WFM) acquisition. Whole Foods, like Target, is an urban and suburban brand and it competes directly for some of the same customers; including hip millennials and soccer moms.

Related menaces include Amazon and Walmart’s new-found focus on fashion and same day delivery. Amazon has been adding clothing lines right and left for the past year or so. Walmart has been on a fashion buying spree of late gobbling up Bonobos, Shoebuy and Moosejaw among others.

Will Target be able to Survive Same-Day Delivery

An even greater threat might be same-day delivery and in-store pickup of online orders where Walmart has the lead. Walmart has invested heavily in pick-up infrastructure, entered into partnerships with Uber, Lyft, and Google Express and experimented with same-day delivery by its’ employees.

Part of the reason, Amazon bought Whole Foods was to head off Walmart’s pickup threat. News reports indicate the Everything Store plans to add merchandise lockers to some Whole Foods locations. A growing threat to Target will be Amazon sales of Whole Foods organic brands and increased discounting at Whole Foods.

Target is poorly positioned to fight off that threat, although its’ resources are impressive. The retailer just bought tech unicorn Grand Junction, which offers local deliveries using a network of 700 carriers, The Los Angeles Times reported. That might help Target blunt the threats of a Walmart/Uber or a Walmart/Google Express alliance.

A potential use for Grand Junction would be to create a delivery ecosystem to counter Google Express or Uber. One reason for that is Walmart’s recent alliance with Google Express, which Target has been participating in. An intriguing use for this would be alliances with other retailers, or possibly restaurant or grocery chains.

Target is still a Good Contrarian Play

Target is not turning around, but it has certainly proved capable of staying afloat. Now, this retailer needs to demonstrate that it is capable of real growth to become a good investment.

Despite that Target is a good risk in return because it pays for shareholders. It rewarded investors with a dividend of 62¢ a share on August 14, 2017, and a 24.93% return on equity on July 31, 2017.

Buy Target if you are looking for a contrarian retailer that will make money. Be prepared to sell it fast because this is one retailer that can take a nosedive into the death spiral fast.