Market Mad House

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

Grocery Wars

Target’s Revenue Collapse Continues

Target’s (NYSE: TGT) revenues are in free fall and investors don’t seem to have noticed.

The latest financial data indicates that the discounter’s revenues fell by $1.17 billion during third quarter 2016. Yet its stock value has increased by over $10 a year since November 1.

Target reported revenues of $71.6 billion in July 2016 and $70.43 billion in October 2016 indicating that its business is shrinking. Yet its share price went from $67.78 on November 1 to $78.50 on November 29, 2016. It looks as if investors either cannot read an earnings report, or simply don’t care about revenue.

Despite Mr. Market’s misplaced confidence, Target’s revenues have fallen by nearly three and a half billion dollars over the past year. The retailer reported revenues of $73.91 billion in October 2015 and $70.43 billion in October 2016. That indicates a major drop in sales at Target stores.


Target’s Business Model is No Longer Working

Since other retailers as diverse as Dollar General (NYSE: DG) and Costco Wholesale (NASDAQ: COST) reported revenue increases during that period. We must conclude that retail is growing, but Target’s business model is no longer working.

That business model being to offer to a somewhat limited selection of higher-quality merchandise at competitive prices – in an attempt to lure in middle and upper class shoppers with higher incomes. The danger here is that those shoppers are Amazon’s (NASDAQ: AMZN) core demographic.

Amazon’s revenues grew by $7.35 billion during third quarter 2016; rising from $120.64 billion in June 2016 to $127.99 billion in September 2016. This does not seem like a coincidence, Amazon is taking business from somebody, Target looks like a likely candidate.

If this trend continues, Amazon’s revenues will exceed $130 billion for the first time in January 2017. Meanwhile, Target’s revenues might drop below $70 billion for the first time since January 2012 when the company a TTM revenue figure of $69.86 billion.


Will the Holidays Save Target?

Many of the Target bears out there are betting on a good holiday season for their favorite store. That ignores what happened last year, when Target’s revenues actually fell over the Christmas-shopping season.

Target reported revenues of $73.91 billion in October 2015; that fell to $73.78 billion in January 2016. Target’s revenues actually fell over last year’s holiday season. It looks as if the discounter might no longer be able to rely upon the Christmas rush to keep it going through the rest of the year.

There are several reasons for us, the biggest being online retail which is changing shopping habit. Many people are doing all or most of their shopping online. This trend is highest among the groups most likely to shop at Target; Millennials (those age 18-35) and Generation X (persons aged 35-51).


Have Moms Deserted Target?

One reason why this is occurring is that many of the women in those generations are in prime childbearing years and they work. Those ladies are busy with work, children, school, housework, soccer practice, etc. they simply do not have time to be pushing a shopping cart around. Now there’s a faster and more convenient alternative that’s often cheaper: online shopping.

Target (and Walmart’s) business model is dependent on there being a new generation of middle class families needing diapers, toys and video game every few years. That generation is certainly out there but it’s not shopping at Target (or any brick and mortar store).

The situation is getting worse for Target because Walmart (NYSE: WMT) and Amazon are ramping up their online capabilities. Walmart acquired; which seems tailor made to steal Target customers, over the summer.

Walmart is also experimenting with a number of initiatives that are likely to hurt Target more. These include in-store pick up of online orders, improved delivery services, Shipping Pass, and rushed construction of smaller locations – the Walmart Neighborhood Markets. Amazon is ramping up its Prime services and offering more consumer goods like diapers.

The days when Soccer Moms even bothered to go to the store and shop might be numbered. If that occurs, Target’s days might be numbered as well.

Okay so Is Target a Good Investment?


Despite all that, skeptical value investors will wonder if Target is a good investment. After all it reported net income of $3.346 billion, a profit margin of 3.7% and a diluted earnings per share number of 5.55 on October 31, 2016.

The answer strangely enough appears to be yes. TGT shares offered investors a dividend yield of 2.95% and a return on equity of 27.25% on November 25, 2016. Obviously part of that return comes from recent share price increases but it is worth taking a look at.

Target shareholders did receive a dividend of 60¢ on November 14, 2016. An increase of 4¢ over May when the dividend was 56¢, 8¢ over 2015 when investors received a 52¢ dividend and 17¢ over February 2014 when they received a 43¢ dividend. All told Target’s dividend has grown by 30¢ since 2012 when investors received 30¢.

The dividend explains the growth in Target’s share values. People are buying this stock because the dividend is growing. It is a good income stock, which is why institutional investments such as mutual funds and pension plans are buying it.

Target’s Dividend is not sustainable

Unfortunately it does not look as if those dividends can continue. One has to wonder how a company can keep increasing its dividend payout while its revenues are dropping by over $1 billion a quarter.

The dividend yield is not sustainable because Target has less cash. Target’s cash from operations fell by $1.342 billion over the year that ended on Halloween Day, 2016. Target reported $6.228 billion in cash from operations on October 31, 2016, and $4.886 billion a year later.


One has to wonder where the dividend is going to come from if cash from operations keeps falling. Nor was it just cash from operations that has fallen, on October 31, Target reported having $1.977 billion in cash and short term investments, that number dropped to $1.231 billion a year later. That was the lowest amount of money in the bank, Target had reported since October 2014.

It looks as if Target is slowly losing its momentum and its float. If this trend continues, Target’s dividend will start falling at some point probably next year. When the dividend falls, Target’s share value will plummet because the dividend is why people are buying it.

Stay away from Target folks, despite the nice dividend this stock has a very questionable future. There are better and more sustainable retail stocks with decent dividend yield available on the market today.