Target makes money amidst the Retail Apocalypse but can it faces a struggle for survival. Notably, Target (NYSE: TGT) records revenues of $22.977 billion and a gross profit of $6.078 billion for 4th Quarter 2018.
Meanwhile, three of Target’s direct competitors; Bed Bath & Beyond (NASDAQ: BBY), Pier 1 Imports (NYSE: PIR), and the insolvent Sears are closing stores. Specifically, Pier 1 could close 145 stores and Bed Bath & Beyond plans 40 closings, USA Today reports. In addition, the bankrupt Sears plans to close 36 of its 200 Kmart stores and up to 74 Sears locations in 2019.
Sears; the owner of Kmart, Bed Bath & Beyond, and Pier 1, are discounters that cater to middle-class customers. Hence, the three retailers compete directly with Target. However, Target makes money while these three struggle to survive.
Target Makes Money but it is just staying afloat
Target is making money in the form of $1.014 billion in operating income and $798 million in net income for 4th Quarter 2018. Moreover, Target reports a free cash flow of $1.752 billion and an operating cash flow of $2.349 billion for 4th Quarter 2018.
However, those numbers are close to the figures from 2018. For instance, Target records an operating income of $1.129 billion, and a net income of $1.087 billion for 2nd Quarter 2018. In addition, Target had an operating cash flow of $2.44 billion a free cash flow of $1.96 billion for 4th Quarter 2017.
Consequently, it looks like Target is just staying afloat. To explain, Target is making just enough money to stay in operation but has little cash left over.
In fact, Target had just $1.556 billion in cash and equivalents on February 2, 2019. Moreover, Target’s cash fell by $1.087 billion during 2018. Target had $2.643 billion in cash on February 3, 2018.
Is Target Burning Cash to Finance Operations?
Therefore, it appears that Target is using cash to finance operations and expansion. This could be fatal if Target’s revenues do not grow significantly.
Unfortunately, Target’s revenues are shrinking. To demonstrate, Target records revenues of $22.983 billion in 3rd Quarter 2017 and $22.977 billion in 3rd Quarter 2018. The shrinkage is slight, but it clear.
Moreover, Stockrow gives Target a negative revenue growth rate of -0.83% for 1st Quarter 2019. This is significant because it indicates Target’s revenue growth fell during the all-important 2018 Holiday Season.
Conversely, Target reports an impressive revenue boost of $5.156 billion from the 2018 holidays. To elaborate, Target records revenues of $17.821 billion for 3rd Quarter 2018 that grew to $22.977 billion in 4th Quarter 2018.
Is Target Amazon-Proof?
Hence, Target is capable of impressive revenue boosts but it may not help the discounter survive.
Target is in danger because its’ most dangerous direct competitor; Amazon (NADAQ: AMZN) makes far more money. For example, Amazon records revenues of $72.383 billion for 4th Quarter 2018.
In comparison, Target reports revenues of $75.356 billion for all of 2018. Thus, Amazon’s revenues for one quarter nearly equals Target’s annual revenues.
Not surprisingly, Amazon is making far more money than Target. In fact, Amazon’s 4th Quarter 2018 gross profit of $27.597 billion is greater than Target’s 1st Quarter 2019 revenues of $22.977 billion.
Amazon could spend Target out of Business
Uniquely, Amazon had $31.75 billion in cash and equivalents and $9.5 billion in short-term investments on New Year’s Eve 2018. Thus, Amazon had $41.25 billion in the bank at the end of 2018.
Therefore, Amazon has the cash to drive Target out of business with relentless spending. Interestingly, news stories indicate that is exactly what Jeff Bezos is doing.
For instance, Amazon plans to build a $1.5 billion Prime Air Hub and 50 Prime Now Hubs; small regional fulfillment centers, Visual Capitalist reports. The purpose of these is to speed up Amazon’s delivery services. Plus, Amazon is adding 35 million square feet of fulfillment centers to the 100 million square feet of fulfillment centers it already has.
Moreover, Amazon is buying 20,000 Mercedes-Benz Sprinter vans for its new delivery fleet, Business Insider reports. Additionally, the Everything Store will finance entrepreneurs willing to become Amazon delivery contractors.
Amazon is a Bigger Treat to Target than ever
All this threatens Target, because it makes Amazon more convenient and easier to use. Consequently, nobody needs to shop at Target because Amazon could deliver everything they need to their doorstep in two hours with Prime Now.
In fact, Amazon Prime will even stock your fridge for you in some markets. To explain, the Amazon Key service lets couriers unlock your front door and put stuff in your home, The Verge reports.
Therefore, a busy soccer mom no longer needs to stop and shop on the way home from work. Furthermore, many people could get out of the habit of brick and mortar shopping completely if Amazon comes to their homes and stocks the pantry.
In the long run, Target could compete with Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) for the poorest and least-educated customers. Obviously, fighting over the poor’s food stamps is not a very profitable business model.
The Kroger, Instacart, and Ocado threat to Target
Nor is it just Amazon that Target has to worry about. For example, America’s largest supermarket operator Kroger (NYSE: KR) doubled its delivery footprint to 1,600 stores with Instacart, Grocery Dive estimates.
In addition, Kroger and Ocado Group PLC (LSE: OCDO) are planning 20 robot-operated fulfillment centers across the United States. Ocado is a British company that operates giant robotic fulfillment centers and a grocery delivery service in the United Kingdom.
Kroger and Ocado will build fulfillment centers in Groveland, Florida, near Orlando, and Butler County, Ohio, near Dayton. Notably, Kroger is buying 68 acres near Monroe, Ohio, for the first robotic customer fulfillment center, The Dayton Business Journal reports.
Under these circumstances, Target customers could soon have two, speedy and convenient same-day delivery services to choose from. Moreover, notorious deep discounters; Amazon and Kroger, operate those services. Add, Walmart (NYSE: WMT) to the mix and Target may not survive.
Target will have to up its delivery game dramatically just survive in that retail environment. Consequently, Target will need to spend a lot of money it lacks just to stay competitive.
Is Target a Value Investment?
However, you can make a strong value case for Target (NYSE: TGT) despite the changing retail environment. The case is Target stock makes money right now; and you can easily dump it, if Target loses money.
Notably, Target is cheap right now; when compared to Amazon and Costco Wholesale (NASDAQ: COST). Specifically Target was trading was trading at $82.03 a share on 23 April 2019. Meanwhile Amazon traded at $1,920.92 a share and Costco sold for $245.48 a share on the same day.
Additionally, Target will a pay dividend of 64₵ on 10 June 2019, while Amazon pays no dividend. On the other hand, Costco paid a dividend of 57₵ on 22 February 2019.
Finally, Target’s dividend has been growing for the past 51 years so it is safe. Target investors were enjoying a dividend yield of 3.12%, an annualized payout of $2.56, and a payout ratio of 47.6% on 23 April 2019.
Target is a good stock but be ready to dump it fast
My conclusion is that Target is a good stock on shaky ground. Target is making money, but it faces large, innovative, well-financed, and dangerous competitors that are dramatically changing the rules of the game.
Therefore, Target is a stock to buy and hold now, but a company with an uncertain future. I think investors should be ready to dump Target fast, but you can make money from it now.