Market Mad House

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

Grocery Wars

What Future Does Target (NYSE: TGT) have?

Target (NYSE: TGT) could have no future because the coronavirus is wiping out brick and mortar retail in the United States.

For example, the U.S. Commerce Department estimates U.S. retail sales fell by 16.4% in April 2020, Business Insider reports. That drop followed an 8.3% collapse in March 2020. Overall US retail sales fell by 23% in two months, ING Chief International Economist James Knightley estimates.

Target is in danger because sales at clothing stores fell by 78.8% and sales at electronics and appliance stores fell by 60.6%. Clothes and electronics are among Target’s major lines. Yet people are not shopping for them.

Could Coronavirus help Target?

The coronavirus could help Target (NYSE: TGT) by killing its competitors.

For example, JC Penney (NYSE: JCP) filed for Chapter 11 bankruptcy on 15 May 2020. Dramatically, some analysts think JC Penney can no longer make money, CNBC notes. All Penney’s stores are closed while Target is still operating.

Target stores are open; however, because Target sells essential items including groceries. Notably, all US grocery sells grew by 13% in April, Digital Commerce 360 estimates. Additionally, CVS Health (NYSE: CVS) operates pharmacies in some Target stores.

CNBC describes JC Penney as a direct competitor to Target. Nor is it just Penney’s in trouble. Nordstrom (NYSE: JWM) plans to close 16 stores, Market Mad House notes. J. Crew Group and Neiman Marcus have also filed for bankruptcy, The New York Times reports.

Therefore, Target could face less competition when coronavirus ends. Other Target competitors Coronavirus could destroy include Sears, Dillard’s (NYSE: DDS), Kohl’s (NYSE: KSS), and Macy’s (NYSE: M).

Could Coronavirus Kill Target?

Coronavirus threatens Target because US e-commerce sales grew by 20.5% in April, Digital Commerce 360 estimates.

In particular, online sales for consumer packed goods grew by 45% in the four weeks ending on 2 May 2020, Digital Commerce 360 estimates. This number could be pleasant news for Target because it includes items grocery stores sell.

Conversely, overall spending in this category fell by 5.9%, Digital Commerce 360 estimates. Thus, people are buying more stuff online but spending less.

Can Target Compete with Amazon

Unfortunately, much of the sales growth goes to Target’s most dangerous competitor Amazon (NASDAQ: AMZN). Amazon’s worldwide sales grew by 26% in first quarter 2020, Digital Commerce 360 estimates.

Moreover, Coronavrius could make Amazon stronger. Jeff Bezos promises to invest all the Everything Store’s $4 billion operating profit back into the company.  Amazon reported a $31.195 billion gross profit for the quarter ending on 31 March 2020.

“Instead, we expect to spend the entirety of that $4 billion, and perhaps more, on COVID-related expenses getting products to customers and keeping employees safe,” Bezos wrote in a press release. Thus, Bezos is strengthening Amazon’s operations by making it more resistant to coronavirus and future pandemic.

Consequently, Amazon could make more money because of coronavirus. To elaborate, Amazon could operate in future pandemics that close brick and mortar stores.

Coronavirus will Make Amazon Bigger and Tougher

Notably, Amazon hired 175,000 new employees in March and April. Thus, Amazon is expanding while coronavirus closes other retailers.

Thus, Target will face a bigger, stronger, and tougher Amazon when coronavirus subsides. Moreover, the bigger and tougher Amazon will be ready for fresh coronavirus outbreaks in the fall and winter.

Dr. Richard Redfield expects a worse outbreak of coronavirus in fall 2020 and next winter, E. W. Scripps reports. Redfield is the director of the Centers for Disease Control and Prevention (CDC).

Can Target Compete with Amazon?

Consequently, Amazon’s business could grow at Target’s expense in the fall as coronavirus returns.  Coronavirus infected 1.486 million Americans and killed 88,557 Americans in the period ending on 16 May 2020, Worldometers estimates.

Target has difficulty competing with Amazon now. I have to wonder Target could compete with a bigger and tougher Amazon.

In particular, Amazon invested $1.5 billion expand its same-day delivery by building a network of smaller fulfillment centers near cities, GeekWire reports. Same-day delivery is free on Prime orders over $35 and costs $2.99 for orders under $35. Amazon is ordering tens of thousands of vans for its delivery service.

Amazon can afford this expansion because it had $49.292 billion in cash and short-term investments on 31 March 2020. In contrast, Target had $2.577 billion in cash and short-term investments on 31 January 2020. Thus, I think target cannot afford to compete with Amazon.

I predict Amazon will destroy Target because it has more resources and competes for Target’s customers. In particular, Amazon will serve all the middle-class families coronavirus traps at home. I expect many of those customers will never return to big box stores such as Target after they get used to buying everything from Prime.

Is Target Making Money?

Target (NYSE: TGT) made a $6.342 gross profit on revenues of $23.398 billion in the quarter ending on 31 January 2020.

Target (NYSE: TGT) made a $6.342 gross profit on revenues of $23.398 billion in the quarter ending on 31 January 2020.

However, Target reported $2.577 billion in short-term investments on 31 January 2020. Thus, Target generates enormous amounts of cash but keeps little of that cash.

Hence, I consider Target’s business model flawed because it cannot generate enough cash to survive coronavirus. Conversely, Amazon is generating incredible amounts of cash. For example, Amazon (NASDAQ: AMZN) reported $27.505 billion in ending cash on 31 March 2020.

Target has no Margin of Safety

I think Target (NYSE: TGT) has no margin of safety in today’s retail environment because of its lack of cash. Unlike Amazon, Target cannot afford to build dozens of new fulfillment centers, hire tens of thousands of delivery drivers, and put tens of thousands of delivery vans on the road.

Hence, I predict Target will have to close stores and lay people off while Amazon operations are expanding. Target could find itself with no customers after coronavirus ends.

Investors Need to Avoid Target (NYSE: TGT)

I think investors need to avoid Target stock because of the low margin of safety. Additionally, I believe Mr. Market overpriced the Target Corporation (NYSE: TGT) at $119.63 on 20 May 2020.

Conversely, I think Target is an excellent dividend stock. For instance, Target shares will pay a 66₵ dividend on 19 May 2020. Impressively, credits Target with 52 years of dividend growth. Overall, each Target share delivered a 2.11% dividend yield, a $2.64 annualized payout and a 5.28% payout ratio on 20 May 2020.

In the final analysis, I think the only value Target shares offer is the dividend. Therefore, I advise investors to avoid Target because I consider the dividend and target’s business model unsustainable in the coronavirus age.