Something strange happened with Target (NYSE:TGT) stock on Tuesday.
Shares opened in positive territory after the retailer delivered another blowout earnings report. In the fourth quarter of fiscal 2020 (which ended Jan. 30, 2021), comparable sales jumped 20.5%, with strong growth in both stores and the digital channel. Revenue was up 21.1% to $28.3 billion, beating estimates of $27.5 billion, while adjusted earnings per share improved from $1.69 to $2.67, also topping the consensus of $2.54.
The retailer declined to give guidance, citing ongoing uncertainty around consumer spending patterns during the pandemic. This may have disappointed some investors, but the stock quickly rose to a 4% gain.
However, shares plunged after the company announced later Tuesday morning at its Investor Day conference that it would invest $4 billion annually in the business over the coming years — a notable uptick from capital expenditures of just $2.6 billion in 2020 and $3 billion in 2019. The market panned the news, and the stock ended the day down 6.8%.
Deja vu all over again
Veteran Target investors will remember a similar announcement four years ago. Back then, Target was struggling, losing market share to more nimble retailers and getting dusted by Amazon. The company announced a plan to invest $7 billion in the business over the next three years, and the stock promptly fell 12%. Those investments would include raising starting wages, expanding its small-format concept, remodeling stores, acquiring the same-day delivery service Shipt, and adding Drive Up and Order Pickup capabilities.
Those investments laid the foundation of the company’s turnaround over the last few years, and helped drive the stock up nearly 300%.
This time around, Target is coming from a position of strength. The company just capped off a year in which it added $15 billion in revenue, more than it had in the previous 11 years combined. And it grabbed $9 billion of market share, strengthening its competitive advantages against department stores like Kohl’s and mall-based chains like Gap.
Investing in the business now is a smart move, as it will help the company maintain its momentum and add to those market-share gains. Management said it plans to spend $4 billion in capital expenditures annually over the next few years to support remodels, new stores, and supply-chain improvements that will add capacity and modernize its network.
After the recent surge in sales, it makes sense for Target to invest in new stores and capacity expansion to support its next stage of growth. For investors to punish the company for doing that is misguided.
Still a bargain
After the sell-off, Target stock again looks like a bargain. Shares are trading at a price-to-earnings ratio of just 23.1, compared to the S&P 500‘s valuation of nearly 40. Analysts, skeptical that the company can tack on another year of growth following last year’s blowout performance, are calling for a modest decline in sales and earnings per share. It won’t be easy for Target to deliver another year of growth, but the company is off to a good start . Comps will become harder from this point forward, but the company should get another tailwind if the $1.9 trillion stimulus package passes Congress, which includes $1,400 direct payments for most Americans.
Beyond that, the reopening should help Target in categories like apparel that generally underperformed during the pandemic, but comparisons with 2020 are only a distraction over the long term. The retailer looks as strong as ever. And it’s well-positioned for long-term growth as it adds 30 to 40 new small-format stores a year, expands its store fulfillment capacity, and makes key growth investments in other areas.
With much of its brick-and-mortar competition in tatters coming out of the pandemic, Target is poised to capture more market share in 2021. The stock continues to look like a winner.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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