It could have been worse.
This Tuesday, Target (NYSE:TGT) disclosed 4Q19 results that, following January's disappointing comps pre-announcement, fell largely in line with recalibrated expectations. Revenue growth decelerated to a meager 1.8%, while adjusted EPS of $1.69 fell comfortably within management's November 2019 guidance of $1.54 to $1.74 - despite lack of much top line traction.
Credit: Company's presentation
Regarding revenues, weak comparable performance in popular holiday items was already anticipated. I suspect that the lapping of Toys "R" Us' bankruptcy played a role on the toy side, while potential loss of competitiveness to Amazon (AMZN) and Best Buy (BBY) may have hurt the Minnesota-based retailer in electronics. Apparel and beauty, Target's top product categories in the most recent holiday months, were the bright spot in the fourth quarter. In fact, the company disclosed to have captured $2.5 billion in apparel and beauty market share over the past two years alone, an impressive feat.
In the aggregate, 4Q19 comps ended up being materially softer compared to the recent trend, see chart below. Not even digital sales looked particularly robust. Of course, lapping a very strong 2018 that benefited from Target's early store remodeling efforts and omnichannel investments did not help. But I believe that the company's steady state for the next several years will look a lot more like the second half of 2019 than the comparable six-month period in 2018. My suspicion seems to have been reinforced by management's comp guidance of a low single-digit increase for 2020.
Source: DM Martins Research, using data from company reports
The more encouraging news is that gross margin improved by about 60 bps, still aided by a combination of many factors that included lower product costs, resilient pricing and a favorable revenue mix. An SG&A increase of 2.9% looked reasonable to me, but Target suffered from op deleveraging due to the deceleration in revenue growth. All accounted for, I don't believe investors should have reasons to be concerned about margins at this moment.
Buy TGT? Well, it depends
I believe that Target's fourth quarter results were less than exciting, but not at all short of de-risked expectations. The full-year guidance seems to suggest that 2020 will be another year of solid execution, even though top and bottom line growth rates will likely continue to decelerate to a more sustainable single-digit pace.
In favor of an investment in TGT today are:
- Business fundamentals that continue to be solid, even if not thrilling.
- Strength in non-seasonal product categories that are likely to help keep sales afloat in the next couple of quarters, benefiting from increased demand for consumer staples driven by the COVID-19 scare in 1Q20.
- Valuation that has come down from what seemed to be unreasonable levels in December 2019 (see chart below).
But pushing me away from the stock is the general state of the equities market, which still appears to be fragile at best. Therefore, if I were bound by a mandate to stay 100% invested in stocks at all times, I would very likely consider shifting my portfolio towards names like TGT. Because I am not, I choose instead to keep my finger on the trigger, watch price action in search for a potential bottom, and possibly buy shares once I believe it is safer to assume more risk in the market.
I do not own TGT because I believe I can create superior risk-adjusted returns in the long run using a different strategy. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.