Target Finds a Downside in Its Urban Strategy

Dividend Stocks

Shares in Target (NYSE:TGT) has taken a hit as investors saw the downside of its urban strategy. Target stock is down 3% so far this week.

Target Stock: TGT Finds a Downside in Its Urban Strategy

Source: jejim / Shutterstock.com

Target is based in Minneapolis and has been the “home team” retailer there since the days of its predecessor company, the Dayton Hudson department store chain. Former Gov. Mark Dayton, who left office in January, is a great-grandson of store founder George Dayton, and the family remains socially prominent. 

The death of George Floyd on a Minneapolis street led to the looting of two of the company’s stores, on East Lake Street in Minneapolis and University Avenue in St. Paul. As rioting expanded, other Target stores in urban centers were looted. Some 200 stores have been closed early, and five are now closed indefinitely. 

If the damage can be contained, however, the riots could make Target stock a bargain.

Target vs. Walmart

Target CEO Brian Cornell has focused on smaller stores in urban locations since becoming CEO in 2015. It’s a contrast with Walmart (NYSE:WMT), which continues to focus on huge suburban outlets under CEO Doug McMillon.

For most of the last five years, this has made Target a better-performing stock than Walmart. The shares have averaged a 12% annual gain in that time, and there’s a 66-cent-per-share dividend that currently yields 2.2%, higher than Walmart’s payout. Before the riots Target stock had recovered from its pandemic market dip and was trading about 2% higher than it did in February.

In the wake of the looting, however, analysts focused on the costs of its urban strategy. The Minneapolis store was where Target experimented on loss prevention. The company works closely with police on the Safe City program, which aims to reduce crimes like shoplifting. It even has its own crime lab. All this increased community anger when the rioting started.

Over the last 30 years urban crime has been on a slow and steady downtrend.  Cities are now half as dangerous as they were. The trend continued into 2019.

The pandemic-related recession, followed by the death of Floyd, combined to turn Target’s gains into risks. 

Can Target Come Back?

Until the riots, both Target and Walmart were being called “essential businesses” for their actions during the pandemic.

During the first quarter ending in April, same-store Target sales were up 10.8%, and digital sales were up over 280% in April, compared with the previous year. Target’s cost of sales, however, rose by 18%. This meant net income was just $284 million, 57 cents per share, down 64% from the previous year’s $795 million, $1.54 per share.

But Target maintained its dividend, as operating cash flow rose to $1.28 billion, nearly four times the previous year’s figure. For the second quarter, ending in July, Target earnings are expected to be $1.47 per share on revenue of $19.3 billion.

In addition to its online efforts, Target is also benefiting from Cornell’s strategy on store brands. The idea is to deliver high quality on its brands instead of lower prices. The company now has dozens of such brands.

The Bottom Line on Target Stock

The long-term danger for Target is that the riots and the pandemic will reverse the last generation’s urban trends, pushing people out of Target’s marketing territory and into Walmart’s.

That risk is already in the stock. Target’s price-earnings ratio of 18.6 is well below Walmart’s of nearly 24. Economic trends continue to focus on computing and biotechnology, both concentrated in urban centers. The pandemic will eventually end.

In late April, I called Target a smart stock to buy during the pandemic.  It’s also a smart post-pandemic buy.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

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