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 Making Money or Doomed?

The Age of Amazon has not been kind to Target (NYSE: TGT), the iconic discounter has been struggling with falling revenues and stock prices for some time. Target has avoided some of the worst aspects of the Retail Apocalypse; such as store closings, but its future is still very much in doubt.

The good news at Target is that revenues have turned around slightly. Target’s revenues fell to a low of $69.32 billion in April 2017 but climbed to $69.80 billion on Halloween Day.

A small gain of $48 million, but still a major drop from the $73.91 billion in revenues Target reported October 2015. Even if they have turned around, Target’s revenues still have far to go to recover from the losses of the past year.

The bad news at Target is that the net income is shrinking; in October 2016, Target reported a net income of $3.346 billion that fell to $2.65 billion a year later. This is far better than the $703 million loss Target reported on Halloween Day 2016, but the income is shrinking.

Why the Holidays may no longer matter at Target

The obvious conclusion here is that Target needs a good holiday season this year. The interesting dilemma is there is strong evidence the holidays will not help Target.

Target’s revenues actually fell during the 2016 holiday-shopping season, ycharts data indicates. Target reported revenues of $70.43 billion in October 2016 that fell to $69.50 billion in January 2017. That indicates Target’s sales actually shrank during the Christmas shopping season.

These demonstrate that some of the traditional retail events such as Black Friday may no longer matter to large retailers like Target. That calls all the money that Target and its competitors are spending on ads, security, extra staff, etc., for holiday shopping into question. Perhaps it would be better spent elsewhere such as in new fulfillment centers, better stores, same-day delivery, better websites, or electric Semi-tractors from Tesla.

Target is Making Less Money

The obvious reality is that Target is making less money from lower sales. To make matters worse, the sales increases it is managing these days are smaller and more costly.

This will cause value investors to ask the all-important question: how much cash does Target have? The answer is less than last year, in October 2016 Target reported a free cash flow of $893 million to fell to $720 million a year later.

Cash and short-term investments have improved dramatically at Target over the past year. Target reported $1.231 billion in the bank in October 2016 and $2.725 billion in October 2017.

Cash from operations also improved dramatically. Target reported $5 billion in cash from operations on October 31, 2016, and $7.044 billion on Halloween Day 2017. That made for an increase of $2.044 billion in 12 months.

Target is a Value Investment

Target is generating more cash, but making less money from its’ operations, which makes it look like a value investment to me. One reason I think Target is a value investment is that is in a good position for acquisitions with all that cash.

Target currently has a lot of value right now in the form of $40.17 billion in assets on 31 October, and an enterprise value of $40.28 billion on 27 November 2017. More importantly, Target is undervalued; it had a market cap of $30.29 billion and a stock price of $55.68 on 27 November 2017.

Investors can definitely make some money from Target stock; they were rewarded with a return on equity of 23.97% on 31 October 2017. They also received a dividend of 62¢ a share on 14 November 2017. That was up from 60¢ in November 2016.

What Should Target do next? Acquisition that’s what

The next logical step at Target should be a strategy of acquisition. Other brands are cheap because of the retail apocalypse and Target certainly has the cash.

The best target would be an online retailer or the online operations of struggling brick and mortar retailers. An interesting acquisition for Target would be JC Penney’s (NYSE: JCP) online operations.

Others would be delivery services such as Deliv, and established online retailers such as (NASDAQ: OTSK). An intriguing brick and mortar acquisition for Target might be Big Lots (NYSE: BIG).

Gobbling up a small box retailer or a supermarket operator such as Sprouts Farmers Market (NASDAQ: SFM) is another smart move, Target should consider. Buying Sprouts would put Target into the lucrative organic and natural grocery sphere.

It would also keep Kroger (NYSE: KR), Amazon (NASDAQ: AMZN), or Walmart (NYSE: WMT) from buying Sprouts. Another advantage would be to leverage Sprouts’ resources for competition with the Amazon/Whole Foods combination. Since Sprouts had an enterprise value of $3.226 billion on 27 November 2017 it is something of a bargain.

Other intriguing potential acquisitions for Target out there include Best Buy (NYSE: BBY), Nordstrom (NYSE: JWN), and eBay (NASDAQ: EBAY). Just buying a stake in some of those companies or rising online retailers would be smart for Target.

Target is a good company, but it is going to have to seriously change its business plan simply to survive. A strategy of acquisition, increased online sales, and reworking of its brick and mortar stores might ensure this discounter’s survival in the Age of Amazon.