Target Corporation (TGT) - Sure Dividend

Target Corporation (TGT)

Updated June 2nd, 2020 by Josh Arnold

Key Metrics

Current Price:

Fair Value Price:

% Fair Value:

Dividend Yield:

Dividend Risk Score:

$119

$102

117%

2.2%

A

5 Year CAGR Estimate:

5 Year Growth Estimate:

5 Year Valuation Multiple Estimate:

5 Year Price Target

Retirement Suitability Score:

5.0%

6.0%

-3.1%

$136

B

Market Cap:

Ex-Dividend Date:

Dividend Payment Date:

Years Of Dividend Growth:

Last Dividend Increase:

$59.8B

08/19/201

09/10/202

52

3.1%

Overview & Current Events

Target was founded in 1902 and after a failed bid to expand into Canada, has operations solely in the U.S. market. Its

business consists of about 1,850 big box stores, which offer general merchandise and food. Target has a market

capitalization of $60 billion and should produce about $83 billion in total revenue this year.

Target reported first quarter earnings on May 20th, with results topping expectations on both the top and bottom lines.

Total comparable sales were up 10.8% in Q1, driven by digital sales, primarily, which soared 141% year-over-year.

Pantry-stocking behavior from consumers saw Target enjoy peak demand during the quarter, driving revenue up 11.3%

to $19.6 billion.

Operating income was $468 million, down from $1.135 billion in the year-ago period. Operating margin as a percentage

of revenue was 2.4%, down from 6.4% in the year-ago period. Gross margin was 25.1% of revenue against 29.6% in last

year¡¯s Q1, primarily reflecting inventory impairments related to the rapid slowdown in Apparel and Accessories, as well

as unfavorable mix as consumers stocked up on consumables. Increased supply chain costs weighed as well, but first

quarter SG&A costs were flat as a percentage of revenue year-over-year.

Adjusted earnings-per-share fell from $1.53 in last year¡¯s Q1 to $0.59 this quarter due to margin impairments. We¡¯ve cut

our estimate of earnings-per-share to $5.00 for this year, but are using an earnings power value of $6 per share to

compute fair value and valuation calculations.

Growth on a Per-Share Basis

Year

EPS

DPS

Shares3

2010

$3.88

$0.84

729

2011

$4.28

$1.10

679

2012

$4.38

$1.32

657

2013

$3.21

$1.58

635

2014

$4.27

$1.90

640

2015

$4.69

$2.16

633

2016

$5.01

$2.32

583

2017

$4.65

$2.44

546

2018

$5.39

$2.52

524

2019

$6.39

$2.60

512

2020

$5.00

$2.64

505

2025

$8.03

$3.53

480

Target has grown its earnings-per-share at an average annual rate of 6.5% during the last decade. Due to fierce

competition and the failed attempt to expand to Canada, Target¡¯s earnings-per-share remained almost flat from 2012 to

2017. However, turnaround efforts have borne fruit and as a result, Target has significantly improved its performance in

recent quarters. The company has reduced its share count by about -4% per year in the last five years. Overall, we

expect 6% annualized growth beyond this year. We see continued comparable sales growth as driving results, along with

a small measure of margin expansion, and an eventual tailwind of the buyback. Target¡¯s digital efforts are also working

extremely nicely, and the company¡¯s small-format stores are performing very well, opening up a new avenue of growth

for the company in the coming years. SG&A costs are continuing to rise, albeit slowly, so that is something to keep an

eye on as well. We also note that share repurchases have been suspended indefinitely as of Q1 2020, and we¡¯ve boosted

our 2025 estimated share count as a result.

1

Estimated date

Estimated date

3

Share count in millions

Disclosure: This analyst has no position in the security discussed in this research report, and no plans to initiate one in the next 72 hours.

2

Target Corporation (TGT)

Updated June 2nd, 2020 by Josh Arnold

Valuation Analysis

Year

Avg. P/E

Avg. Yld.

2010

13.9

1.6%

2011

11.9

2.2%

2012

13.7

2.2%

2013

20.7

2.4%

2014

14.7

3.0%

2015

16.6

2.8%

2016

14.6

3.2%

2017

14.2

4.0%

2018

14.2

3.3%

2019

14.4

2.8%

Now

19.9

2.2%

2025

17.0

2.6%

After the market-wide selloff due to the coronavirus, Target shares rebounded sharply, and now trade modestly in

excess of our fair value estimate at 17 times earnings. Shares trade today at an elevated price-to-earnings ratio of 19.9

at a time when earnings are declining significantly. We also note this is the lowest yield the stock has traded with for

several years, going back to the aftermath of the financial crisis. If the stock reverts to our estimate of fair value over the

next five years, it will produce an annualized headwind of about -3% to total returns.

Safety, Quality, Competitive Advantage, & Recession Resiliency

Year

Payout

2010

22%

2011

26%

2012

30%

2013

49%

2014

45%

2015

46%

2016

46%

2017

53%

2018

47%

2019

41%

2020

44%

2025

44%

Target has grown its dividend for more than five decades. However, as it has grown its dividend much more quickly than

its earnings recently, the company has markedly increased its payout ratio, from 20% in 2009 to 44% this year.

Moreover, the company is heavily investing in its business in order to navigate through the changing landscape in the

retail sector. Therefore, Target is likely to raise its dividend at a slower pace in the upcoming years.

Target¡¯s competitive advantage comes from its discounted prices on attractive merchandise in its guest-friendly stores.

However, given the price war in the retail sector, Target¡¯s moat is declining. In addition, as consumers tend to curtail

their consumption during recessions, the company is vulnerable in such periods. In 2008, its earnings-per-share fell 14%. Nevertheless, that performance was much better than that of most companies, which saw their earnings collapse

during the Great Recession. Moreover, it took only one year for the earnings of Target to return to their pre-crisis level.

Therefore, while Target is vulnerable to economic downturns, it is much more resilient than most stocks in such periods.

Final Thoughts & Recommendation

We see Target as overvalued after the recent rally, and with a murkier growth outlook given the margin situation. The

company¡¯s dividend history remains outstanding, but the yield is quite low. We see total annual returns at just 5% in the

coming years after the recent rally. Given the margin situation and rapidly-increasing valuation, we are moving Target

down from buy to hold.

Total Return Breakdown by Year

Target Corporation (TGT): Total Return Decomposition

120%

100%

80%

60%

40%

20%

0%

-20%

97.9%

23.0%

5.1%

2.7%

2014

-1.5%

2015

5.0%

-6.3%

2016

Total Return

2017

Dividend Return

2018

2019

Sure Analysis Estimates

Price Change

Click here to rate and review this research report. Your feedback is important to us.

Disclosure: This analyst has no position in the security discussed in this research report, and no plans to initiate one in the next 72 hours.

Target Corporation (TGT)

Updated June 2nd, 2020 by Josh Arnold

Income Statement Metrics

Year

Revenue

Gross Profit

Gross Margin

SG&A Exp.

D&A Exp.

Operating Profit

Op. Margin

Net Profit

Net Margin

Free Cash Flow

Income Tax

2010

67,390

20,805

30.9%

13,469

2,084

5,252

7.8%

2,920

4.3%

3,142

1,575

2011

69,865

21,559

30.9%

14,106

2,131

5,322

7.6%

2,929

4.2%

1,066

1,527

2012

73,301

22,266

30.4%

14,643

2,044

5,579

7.6%

2,999

4.1%

2,979

1,741

2013

71,279

21,240

29.8%

14,465

1,996

4,779

6.7%

1,971

2.8%

4,634

1,427

2014

72,618

21,340

29.4%

14,676

2,129

4,535

6.2%

(1,636)

-2.3%

2,679

1,204

2015

73,785

21,544

29.2%

14,665

2,213

4,910

6.7%

3,363

4.6%

4,520

1,602

2016

70,271

21,126

30.1%

14,217

2,318

4,864

6.9%

2,734

3.9%

3,897

1,295

2017

72,714

21,589

29.7%

15,140

2,476

4,224

5.8%

2,914

4.0%

4,402

722

2018

75,356

22,057

29.3%

15,723

2,474

4,110

5.5%

2,937

3.9%

2,457

746

2019

78,112

23,248

29.8%

16,233

2,604

4,658

6.0%

3,281

4.2%

4,090

921

Balance Sheet Metrics

Year

Total Assets

2010

43,705

2011

46,630

2012

2013

48,163 44,553

2014

2015

2016

41,172 40,262 37,431

2017

2018

2019

40,303 41,290 42,779

Cash & Equivalents

Acc. Receivable

Inventories

Goodwill & Int.

Total Liabilities

Accounts Payable

Long-Term Debt

Total Equity

D/E Ratio

583

6,153

7,596

N/A

28,218

6,625

15,726

15,487

1.02

794

5,927

7,918

242

30,809

6,857

16,483

15,821

1.04

784

670

----7,903 8,278

224

331

31,605 28,322

7,056 7,335

17,648 12,572

16,558 16,231

1.07

0.77

2,210 1,038 2,512

------8,282 8,601 8,309

298

277

259

27,175 27,305 26,478

7,759 7,418 7,252

12,725 12,760 12,749

13,997 12,957 10,953

0.91

0.98

1.16

737

787

2,577

------8,597 9,497 8,992

709

699

686

28,652 29,993 30,946

8,677 9,761 9,920

11,398 11,275 11,499

11,651 11,297 11,833

0.98

1.00

0.97

Profitability & Per Share Metrics

Year

2010

2011

Return on Assets

Return on Equity

ROIC

Shares Out.

Revenue/Share

FCF/Share

6.6%

18.9%

9.2%

729

92.39

4.31

6.5%

18.7%

9.2%

679

102.16

1.56

2012

2013

2014

2015

2016

6.3%

4.3%

-3.8%

8.3%

7.0%

18.5% 12.0% -10.8% 25.0% 22.9%

9.0%

6.3%

-5.9% 12.8% 11.1%

657

635

640

633

583

110.51 111.06 113.45 116.58 120.64

4.49

7.22

4.19

7.14

6.69

2017

2018

2019

7.5%

7.2%

7.8%

25.8% 25.6% 28.4%

12.5% 12.9% 14.3%

546

524

512

132.14 141.33 151.50

8.00

4.61

7.93

Note: All figures in millions of U.S. Dollars unless per share or indicated otherwise.

Disclaimer

Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this research report should be construed as a recommendation to follow any investment strategy

or allocation. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed

on any such statements or forecasts when making any investment decision. While Sure Dividend has used reasonable efforts to obtain information from reliable sources, we make no

representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference

to the contrary should be made. There is a risk of loss from an investment in marketable securities. Past performance is not a guarantee of future performance.

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