Should You Buy Target (TGT) Stock?

Target’s (ticker: TGT) efforts to improve customer shopping to “adapt to rapidly evolving guest preferences” have ushered in new heights for the retailer.

The company’s “guest preference” initiative was essentially a euphemism for investing in its e-commerce operations to combat Amazon.com ( AMZN) in the digital retail sales and delivery space.

Target’s digital offerings during the global health crisis put it on par with Walmart ( WMT) and Amazon, says Scott San Emeterio, CEO of BallStreet Trading in New York City, and the company has the numbers to show for it.

That said, the Minneapolis-based big-box retailer still competes directly against the likes of Macy’s ( M), Kohl’s ( KSS), Walmart and Best Buy ( BBY), as well as digital sales giant Amazon.

How have Target’s efforts panned out, and where is the company headed from here? What can investors expect from retail’s sleeping giant? Let’s take a look:

— Target at a glance.

— Pros of buying TGT.

— Cons of buying TGT.

— The bottom line for TGT shares.

TGT Stock at a Glance

Over the last few years, Target has invested heavily in sprucing up its delivery service to better compete with Amazon, but with a twist: Instead of relying on an Amazon-like network of high-functioning fulfillment centers, TGT would deliver goods straight from its stores.

Target has earned its place among its competitors based on its quarter-over-quarter financial gains.

“There is little room for debate that Target is a brand that has been able to define success during (the pandemic) and the new normal by tripling digital sales year over year,” San Emeterio explains. “Amazon is still the thousand-pound gorilla in the room, but Target just proved they are here to stay and will contend in a very competitive digital space.”

Amid the pandemic, Target’s delivery service Shipt has become critical to the company’s success as customers choose to stay home rather than risk going out. The company has doubled down on in-store pickups and instituted its newer Target Drive Up contact-free pickup program to encourage shoppers to keep making purchases at the store location, measures that helped boost sales in the first quarter.

[SEE: The 8 Most Active Stocks Investors Need to Watch.]

Pros of Buying Target Stock

Target has been one of the retailers that has taken the lead in digital sales, and the company has its long-term investment in its digital strategy to thank.

Target made headlines with its e-commerce sales last quarter and continued its strong online activity into its latest quarter. The company saw digital sales growth of 155%, same-day services increased 217% and total revenue growth was 21.3% compared with last year. Overall, Target’s total sales for the third quarter grew by 20.7%.

The retailer’s growth in e-commerce has been a pleasant surprise even for the company’s chief executive.

“The result is unprecedented market share gains and historically strong sales growth, both in our stores and digital channels,” said Brian Cornell, chairman and CEO of Target, in the third-quarter earnings release.

Target has been expanding revenue and earnings at a time when other retailers are shuttering. While the retailer has been a beneficiary of the pandemic, its substantial surge in sales and stable revenue growth in 2020 demonstrates its savvy digital strategy.

Target’s total revenue growth rate has been consistently increasing. Year-over-year revenue growth was 11.3% in the first quarter, 24.7% in the second quarter and 21.3% in the latest quarter. Compare this with big-box retailer Walmart: 8.6% year-over-year growth in the first quarter, 5.6% in the second quarter and 5.2% in the third.

The retailer reported earnings per share (EPS) of $2.79, 105% higher than last year, exceeding expectations. TGT paid $340 million in dividends for the third quarter, a 3% increase in dividends paid during the same time last year of $337 million.

Target’s competitive revenue growth has translated to an increase in the stock’s market value this year. TGT has grown 35% year to date.

Target announced its collaboration with Ulta Beauty in November to create “an exciting new beauty experience.” The retailer has existing retail partnerships with Disney ( DIS) and CVS ( CVS).

“If Target can continue to pair with other big retailers who have also been struggling during the pandemic, then Target can establish itself as the go-to way to shop these brands like Ulta. This would keep them viable and would be a way for them to create their unique digital path compared to Walmart and Amazon,” says Allison Ostrander, director of risk tolerance at Simpler Trading in Austin, Texas.

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Cons of Buying Target Stock

Despite the boost from digital sales, largely thanks to consumers stocking up on grocery items, analysts point to some concerns.

There is stiff competition among retailers, and the battle to gain market share in this space proves that large-box retailers must have a framework in place to succeed in the digital vertical.

The costs to maintain its competitiveness and meet consumer demand in this space are high, which poses a concern for consumer discretionary, says analyst Brian Yarbrough from Edward Jones in Kansas City, Missouri, who points to potential challenges as the company faces “increasingly competitive pressures” from other larger internet retailers.

“The company’s online sales are not as profitable as sales in physical stores due to the cost for shipping goods. We believe these competitive issues will pressure profit margins,” Yarbrough says.

Target has multiple services for customers who choose to not shop physically in stores. There’s Shipt, where customers get their items delivered to their home as quickly as one hour; same-day services like Order Pickup, where customers buy items online and pick them up in stores; and the Drive Up service, where customers purchase items on the Target app and a Target staff member brings the order to their car.

[Read: 9 Retail Stocks to Buy This Holiday Season.]

Target claims that fulfilling orders online drives down the cost to the retailer, saying “store pick up is 90% cheaper, per unit on average than shipping from a warehouse.” The retailer also observes that customers are opting for same-day services instead of shipping. As this demand grows, Target says its digital fulfillment costs go down.

“While we believe the company is in a much better competitive position from investments made several years ago, we think the cost to compete will continue to rise, limiting profit growth,” Yarbrough says.

As hopes for the end of the pandemic are in sight given positive vaccine news, a potential market shift from stocks that have benefited from the health crisis toward value stocks that are poised for growth from the economic improvement may turn into a market trend.

“The biggest risk to TGT stock now is the broader rotation toward value stocks,” says David Russell, vice president of market intelligence at TradeStation Crypto in Chicago.

“As investors look for more of the economy to reopen, they’re focusing on beaten-down stocks near their lows. Everyone knows TGT has done a great job adjusting to the digital economy. But the sentiment is moving in a different direction, at least for now,” he says.

Target has been a beneficiary of the pandemic as consumers have been shopping for goods online, exhibited by TGT’s blowout digital sales. This means investors looking to rotate into value may not have their eye on the retailer.

The Bottom Line for TGT Stock

While Target has proven to be a strong retailer among its competitors, investors need to consider the full picture — including how the retailer is set to perform and how that will correspond with shifting market trends.

Investors can expect solid sales trends to continue throughout the remainder of the year, but Yarbrough shares concerns about Target being able to grow in 2021 on top of its strong growth in 2020.

“Many of the tailwinds to the business in 2020 will not be present as vaccines become available and consumers return to more normal shopping habits,” he explains.

But Russell says TGT was moving in the right direction before the pandemic and has come through in this environment.

“It now enters the key holiday shopping season with a lot of positive momentum thanks to the market-share gains,” Russell says. “Brian Cornell has made the company a go-to vendor for millions of shoppers. That keeps it in a strong position for years into the future.”

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Should You Buy Target (TGT) Stock? originally appeared on usnews.com

Update 11/19/20: This article was published previously and has been updated with new information.

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