Target reminds us why a healthy balance of value-growth stocks is important

Here’s big box retailer Target reminding us why a healthy balance of value-growth stocks is important.

5 years later, Target’s investments have paid off…

While Target didn’t have the big gains like high growth stocks (while it lasted), it benefited from being an essential business — beating the S&P 500 in the past two years. Now it’s trying to carry its growth past the pandemic.

Yesterday, Target reported a strong 2022 outlook and 12% earnings growth (ahead of estimates) — sending its stock up 10%.

It’s also investing $5B this year to scale operations — similar to its $7B of investments into digital and store growth 5 years ago. How’s it performed since? Not bad.

• 5 year return: 282% total return (33% compounded annually) — despite being down 15% from November — on top of paying a 1.6% dividend.
• This time, investors reacted differently to the investment announcement — whereas back in 2017, the stock fell 12%.

Clever tactics to attract store traffic…

Target can thank its clever strategy for its sales growth — its stores resembling mini malls:

• Featuring partners like Starbucks, Ulta Beauty and Disney (among others) within it.
• Rolling out its successful ear-piercing services to 200 stores.

Reel ‘em in with Starbucks… Hook ‘em with its own private brands — which are cheaper for consumers and more profitable for Target — and made up ~⅓ of Target’s 2021 sales.

Stores with Ulta shops also see stronger sales in beauty and adjacent categories. It’s all incredibly well thought out.

Don’t forget digital: Target is also investing in its same-day delivery and curbside pickup services — which tripled in the past two years. Last year, Target opened its first “sortation center” — warehouses using automation to pack orders — and plans to have six by April.

Investors: 2022 will be tough, even for Target

Retailers face a tough consumer environment in 2022 — with inflation and now WWIII concerns impacting spending.

• A tight labor market is forcing Target to raise wages and employee benefits.
• Supply chain issues and inflation are hitting the bottom line — but large retailers like Target and Walmart are managing better than small retailers.

To compete, Target is keeping prices low despite rising inflation — price increases being a last resort. If investors have learned anything in the past few months, it’s — don’t underestimate inflation.