Conventional wisdom teaches that Target (NYSE: TGT) is a discount dinosaur on the fast track to extinction.
Surprisingly, Target is making money and growing in the retail apocalypse. However, Target is making less money though its revenues are growing.
For example, Target’s quarterly revenues grew from $18.422 billion on 3 August 2019 to $18.665 billion on 2 November 2019. Target’s quarterly gross profit; however, fell from $5.797 billion on 3 August 2019, to $5.73 billion on 2 November 2019.
Target is Making Less Money
Meanwhile, Target’s quarterly net income fell from $938 million to $714 million during the same period. Additionally, Target’s quarterly operating income fell from $1.324 billion on 3 August 2019 to $1.002 billion on 2 November 2019.
In contrast, Target’s revenues grew at a rate of 4.74% in the quarter ending on 2 November 2019, Stockrow estimates. That growth rate was up from 3.63% in the previous quarter.
Therefore, I think Target is moving merchandise but making less money. Consequently, I have to wonder if Target’s supposed ecommerce growth rate of 34%, reported by Multichannel Merchant, in 2nd Quarter 2019 is helping the company. I suspect Target could be losing money on increased sales.
Target is Generating Less Cash
Significantly, Target is generating less cash. In particular, Target’s free cash flow fell from $1.755 billion on 3 August 2019 to $357 million on 2 November 2019. However, Target’s free cash flow rose from -$327 million on 4 May 2019.
In contrast, Target’s operating cash flow fell from $2.489 billion on 3 August 2019 to $1.347 billion 2 November 2019. Therefore, Target generates a lot of cash but its cash flow is shrinking.
Significantly, Target’s negative investing cash flow grew from -$735 million on 3 August 2019 to -$976 million on 2 November 2019. Additionally, Target’s financing “cash flow” fell from -$1.271 billion to -$1.058 billion in the same period.
Finally, Target’s cash and equivalents fell from $1.656 billion in August to $969 million in November. Therefore, Target has far less cash when its biggest competitor has vast amounts of cash.
Can Target Compete with Amazon?
Meanwhile, Amazon (NASDAQ: AMZN) reported $43.401 billion in cash and short-term investments on 30 September 2019. Thus Amazon has 43 times more cash than Target.
I consider Amazon Target’s biggest competitor because Target’s urban middle-class customers are the most probable Amazon shoppers. For instance, I think the average Target shopper is a middle-class soccer mom. That demographic is Amazon’s target market.
Accordingly, Amazon is expanding its fashion business with a limited-private label they call the Drop, Macarta claims. The Drop is a series of “influencer-designed” apparel collections aimed at younger female shoppers.
How the Drop Threatens Target
For example, The Drop launched a collection with “Instagram influencer” Milena Karl on 5 September 2019. Jeff Bezos’ hope is that customers who see the clothes Karl promotes on Instragram will buy through Amazon.
I think The Drop is an attempt to snatch Target customers. In particular, Bezos is trying to get future soccer moms; while their shopping habits are still forming. Bezos’ plan is to create a generation of women who only shop on Amazon for everything. Tellingly, the best book about Amazon is The Everything Store: Jeff Bezos and the Age of Amazonby Brad Stone.
Amazon can launch projects such as the Drop because it has lots of cash. Target, on the other hand, could have to borrow money to launch its own Drop. In addition, Amazon can afford to pay Instagram Influencers such as Milena Karl huge fees; or commissions, to join The Drop.
How Amazon can use Instagram to Destroy Target
Therefore, Amazon can use social media; including the Facebook (NASDAQ: FB) owned Instagram, to destroy Target. Statista estimates there were 105 million active Instagram users in the United States in 2018.
Thus, Amazon can reach an “audience” of 105 million viewers through Instagram. Moreover, Amazon can create Drops for products such as tools, toys, and electronics. A use of this marketing strategy is a Drop for guys where men talk about “cool new tools” or electronics.
In this environment, I have to wonder how a brick and mortar store such as Target can survive. Amazon can leverage media Target cannot and reach customers at home with free delivery.
Is Target Stock Overpriced?
I think Mr. Market overpriced Target (NYSE: TGT) at $124.75 on 4 December 2019.
I believe Target is overpriced because its income and cash-flow are shrinking. Additionally, I do not think Target has the resources to compete with Amazon.
Consequently, I think Target could have to cut its operations and reduce its footprint to survive. As a result, I believe Target’s stock price will collapse.
Is Target a Good Dividend Stock?
Though Mr. Market overprices it, Target (NYSE: TGT) is a good dividend stock. In fact, Target paid a 66₵ dividend on 19 November 2019. Thus, shareholders could make money from Target.
Importantly, Target’s dividend has been growing for 51 years, Dividend.com reports. In detail, Target shares offered a dividend yield of 2.13%, an annualized payout of $2.64, and a payout ratio of 41.25% on 4 December 2019.
In the final analysis, Target is a good company that has not mastered the art of retail survival. Target shareholders could make money in the short-term but I predict this retailer could shrink and collapse in the near future.