Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Target Surviving the Retail Apocalypse?

I think no retailer is more vulnerable to the retail apocalypse than Target Corp (NYSE: TGT).

Target’s main customer base is urban and suburban women between 20 and 50 years of age. Unfortunately, that group is Amazon’s (NASDAQ: AMZN) favorite demographic.

Moreover, almost everything Target sells; furniture, electronics, groceries, home furnishings, small appliances, apparel, shoes, etc. are items Amazon can easily sell online. Therefore, Target competes directly; or indirectly, with Amazon in almost every category.

How Online Retailers are Killing Target

Nor is it just Amazon, the home furnishings retailer Wayfair (NYSE: W) is experiencing explosive growth. For instance, Statista estimates the number of active Wayfair customers grew from 10.99 million in 2017 to 15.16 million in 2018.

Notably, Statista estimates the number of orders Wayfair ships grew from 3.31 million in 2013 to 28.08 million in 2018. Specially, Wayfair shipped 5.24 million orders in 2014, 9.17 million orders in 2015, 14.06 million orders in 2016, and 19.41 million orders in 2017.

Wayfair competes directly with Target in the home furnishings niche. In addition, Wayfair is now America’s sixth largest online retailer with sales that are larger than Target’s.

Are Americans Kicking the Shopping Habit?

Wayfair hurts Target because each of its orders represents one shopping trip a customer did not make to the mall or shopping center. I think Wayfair and Amazon’s growth, shows Americans are getting out of the shopping habit.

Americans are making fewer and fewer trips to the store. Correspondingly, Business Insider predicts over 7,100 stores will close in the United States in 2019. In particular, Payless Shoes is closing all 2,500 of its stores in the United States.

In fact, retailers closed a record 102 million square feet of store space in 2017 and 155 million square feet of store space in 2018, Business Insider estimates. Consequently, people have fewer places to shop and reasons for shopping trips.

Moreover, like Payless many of the stores closing; including over 800 Gymboree and Crazy 8 locations and 650 Dress Barn locations, cater to the same markets as Target. To explain, Gymboree and Dress Barn sell discount apparel like Target. Stores like Payless and Dress Barn are closing because people are shopping online.

Can Target Compete with Amazon?

For instance, Amazon now controls 7.7% of US retail sales with 100 million paid Prime Members, Bloomberg estimates.

Notably, Amazon sold $24.61 billion worth of apparel and $25.4 billion worth of groceries in 2018. In addition, Amazon sold $23.6 billion worth of consumables in 2018.

In comparison, Target’s total revenues for the year ending on 2 February were $75.356 billion. Thus Amazon’s sales in three areas in 2018, equal Target’s revenues for the entire year. Meanwhile Amazon’s total revenues for 2018 were $233.887 billion. Dramatically, Statista estimates Target had online sales of $4.823 billion in 2018.

The numbers show, Target is incapable of competing directly; or indirectly, with Amazon. Notably, Amazon’s revenues grew by 30.93% in 2018, while Target’s revenues grew by 3.63%.

Can Same-Day Delivery Save Target?

Target is trying to stay competitive by offering same-day delivery of 65,000 items in 47 states for $9.99, the Associated Press reports.

Previously, Target customers had to pay $99 a year or $14 a month for a Shipt membership to get same day delivery. Target will add Shipt’s features to its website and offer loyalty card holders a 5% discount to encourage same day delivery.

I think same-day delivery because there is no evidence most customers want it. Nor is there evidence customers will use same-day delivery.

However, several retailers including Amazon, Kroger (NYSE: KR), and Walmart (NYSE: WMT) are betting heavily on same-day. In addition, Walmart is offering free one-day shipping for orders over $35. Meanwhile, Amazon offers one-day delivery for a $119 Prime subscription.

The Risks from Same-Day Delivery

Target face serious risks from same-day delivery. Potential same-day delivery risks include; higher labor costs, unrealistic customer expectations that are hard to meet, and greater insurance costs. For instance, the risk of accidents involving same-day delivery drivers.

Moreover, Walmart is taking serious risks with a service that lets its drivers stock customers’ refrigerators. I have to wonder who will be liable if the Walmart driver gets hurt in the customer’s house.

If the driver slips on the customer’s carpet or gets bitten by the customer’s dog, for instance. Plus, will Walmart be liable if its driver leaves the customer’s door unlocked, allowing burglars to get in.

Under the circumstances, the liability and insurance costs same delivery creates could exceed its benefits. Therefore, retailers with limited resources, like Target could take unnecessary risks with same-day experiments.

Is Target Making Money?

Currently, Target’s resources are substantial but small when compared to Amazon or Walmart.

For example, Target reported quarterly revenues of $17.627 billion, a quarterly gross profit of $5.379 billion, a quarterly operating income of $1.135 billion, and a quarterly net income of $795 million on 4 May 2019. Target is burning through a lot of cash, however.

In fact, Target reported a negative free cash flow of -$327 million, a negative financing cash flow of -$57 million, and a negative investing cash of flow -$649 million on 4 May 2019. Yet Target is generating some cash in the form of a $323 million operating cash flow for the quarter ending on 4 May 2019.

Unfortunately, Target has very little cash left over from its operations. Target had $1.173 billion in cash and equivalents on May 4, 2019, and no short-term investments. Meanwhile, Amazon had $23.115 billion in cash and equivalents and $13.905 million short-term investments on 31 March 2019. Thus, Amazon had $37.03 billion in extra cash at the end of the last quarter.

Conversely, Walmart had $9.255 billion in cash and equivalents on 30 April 2019. However, Walmart reported a gross profit of $30.891 billion and quarterly revenues of $123.925 billion on the same day.

In the final analysis Target is making money from its 1,844 stores but it lacks the resources to keep up with Amazon and Walmart. Thus, I think avoiding direct competition with those giants is a smart strategy for Target.

Is Target a Value Investment?

It is easy to see why investors still like Target. The discounter plans a 66₵ dividend for 10 September 2019. That dividend will be 2₵ higher than the 64₵ paid on 10 June 2019.

Moreover, that dividend is high for a stock that was trading at $85.85 a share on 11 July 2019. In detail, Target offered a dividend yield of 3.08%, an annualized payout of $2.64 a payout ratio of 49.1% on the same day. Finally, estimates Target’s dividends have been growing for 51 years.

In contrast, Amazon paid no dividend on its $2,001.07 shares and Walmart plans to pay 53₵ on its $113.92 shares on September 3, 2019. Thus, Target is a better dividend stock in retail.

Despite the dividend, I think Mr. Market overprices Target because a lack of resources limits its growth potential. I advise investors to stay away from Target because it will have a hard type keeping up with Amazon.

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