Target Corp is dipping: is this a good time to buy?

Being greedy when others are fearful is an easy enough saying for value investors, but picking up a stock that the market has turned on takes nerves of steel. It may be a little easier at Target, the multibillion-dollar retailer, given its huge scale and presence in American life. In the past week its shares have dropped by roughly 20 per cent after it missed earning expectations for its third quarter and painted a glum outlook for the remainder of the year. So should investors be buying the dip at the American retail giant, or running for cover?
Its third-quarter report last week was not pretty. Comparable sales rose by just 0.3 per cent in the three months ended on November 2, at the low end of Target’s previous estimate range of 0 to 2 per cent. Meanwhile profits dropped 12 per cent to $854 million, compared with analyst expectations of more than $1 billion.
Profits fell more than expected partly because of costs related to importing more products than usual before a port strike in October. But Target has been struggling with weak sales for a while; its strategy of pushing its own-label brands and cutting prices on everyday goods has not worked. Revenue has been mostly shrinking or flat for the past two years.
Unlike its biggest competitor, Walmart, Target makes most of its sales from non-essential areas such as home and apparel. Groceries make up less than a quarter of its revenue. As such, while its recent price cuts have drawn in more shoppers, they have also spent less money in stores and online.
But most embarrassing last week was that Target bosses, who a few months ago raised their financial targets, had to backpedal and pull them down again just as the company headed into the critical Thanksgiving and Christmas season. Adjusted earnings per share are now expected to land between $8.30 and $8.90, compared with previous guidance of $9 to $9.70.
These numbers are alarming to investors because they are in such stark contrast with the reports coming from other American retailers. On the same day that Target slumped, TJX — the owner of TK Maxx and HomeSense — reported comparable store sales had grown by 3 per cent, and forecast a similar rise in the current quarter. Costco Wholesale reported a 5 per cent rise in comparable sales in the four weeks ended November 3.
Walmart beat expectations with comparable sales growth of 5.3 per cent, its 11th consecutive beat. It also raised its guidance for its current financial year for the third time, now expecting net sales to grow somewhere between 4.8 per cent to 5.1 per cent on a constant currency basis. The $726 billion retailer, which this column ranked as a buy in March, has delivered a total return of 51 per cent in the space of less than eight months.
In this light, the discount on Target’s shares does not look so surprising, at a forward price to earnings ratio of 14, compared with its five-year average of 19. It is well below its rivals, with Walmart at a multiple of 37, TJX at 29 and Costco at a steep 54.
Brian Cornell, Target’s boss, told investors last week there were some “macro short-term headwinds” that the company had to embrace and understand, though he said he was convinced “over time those trends will reverse”. Yet Walmart shoppers seem unaffected — while Target said its home and hardlines sales, which includes appliances and toys, were weak, Walmart reported that its general merchandise division had grown, with particularly strong demand for clothes and toys.
Given a sales strategy that has failed to deliver any inspiring growth over the past couple of years, a lack of any obvious moat and signs that Walmart could be taking some of its market share, the discount on Target’s shares looks justified. Advice Avoid Why Discount looks justified given weak performance against rivals
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