Online Retail Could Be a Boost for TGT Stock
Merchandise retailer Target Corporation (NYSE:TGT) reported better-than-expected results on Wednesday, only to see its stock fall on the market. TGT stock is down by more than seven percent year-to-date after seeing a neat run in the second quarter. The logic behind the market’s irrational reaction seems to go over my head. Here’s what the Street is missing on Target stock.
Shorts were expecting Target to miss Street expectations. Instead, not only did the company surprise us with great numbers this quarter, but it also sent positive guidance for the next quarter. What caught my eye more than its in-store performance, though, was its digital sales performance.
Target Stock Riding Online Retail
Although online sales currently account for only a small portion of Target’s total sales, the company is now actively eyeing this segment as a growth driver. The U.S. retail sector has been in decline, courtesy of warm weather and weakening consumer spending. However, the online retail industry is still holding up.
Target posted a solid 1.9% in comparable-store sales growth, of which 0.4% was contributed solely by digital sales. (Source: “Target Q3 2015 Earnings Call Transcript,” Seeking Alpha, November 18, 2015.) Target’s digital sales saw a healthy 20% increase in the latest quarter. Compared to retail behemoth Wal-Mart Stores, Inc. (NYSE:WMT), which managed to post only half of that number at 10%, and Target’s sales growth comes out looking pretty impressive.
The digital selling channel is fast gaining interest of traditional brick-and-mortar retailers, as the larger population makes a shift to handheld, mobile devices that keep them connected on the go. With 5G being considered the future of technology and smartphone subscriptions in the U.S. expected to increase by a massive 45% in the next five years, the digital retail space seems primed for growth.
The stats haven’t gone unnoticed at Target’s headquarters, where management personnel have put their heads together to narrow down the company’s focus on this segment. Target boasted a good 29% year-to-date growth for the segment and management is expecting another 20% growth from digital sales in the next quarter.
How is the management making this possible? Through targeted Google ads, a user-friendly web site, and an interactive phone application called “Target Cartwheel.” Additionally, in order to drive online traffic, Target management has started introducing attractive deals, including free shipping to online buyers during this holiday season and a 25%-off voucher for online purchases of more than $75.00 on Black Friday.
Target’s savings app, Target Cartwheel, has particularly proven a boon to its online business. With more than 20 million shoppers already using this platform, Target is in a strong position to gain ground in this segment. I, for one, like to keep my phone handy while shopping. It may sound strange to many, but for me, it’s a time-saver. I plan my purchases ahead of time, but I also like to browse through their online product shelves while in the store to see where else I can save. Evidently, I’m not the only one. Target has seen some 10%–15% of its digital sales being picked up in-store.
One recent move that has helped Target to bolster its online sales in particular is quick deliveries. Target’s “available to promise” service guarantees delivery within three days (or less) from the time the order is placed. This is its next big weapon to claw at Amazon.com, Inc.’s e-commerce share. While this delivery standard isn’t as quick as Amazon’s “Prime Now” service, which delivers within an hour for a fee and within two hours for free, it is still faster than most peer players in the online retail space. Having achieved a three-day delivery standard, Target’s management plans to further cut down on its delivery times moving forward.
The Bottom Line on TGT Stock
Target’s recent performance, coupled with promising future growth prospects from the online segment, makes me hopeful that a turnaround is in the cards for Target and TGT stock. With a healthy dividend yield of 3.1% and a history of buybacks, TGT stock remains a valuable long-term investment.