Target Offers Invaluable Investing Lesson; Few Will Listen

Buying into bad news can prove remarkably profitable, but most investors lack the fortitude. 

This past Tuesday Target Corp. (NYSE: TGT) reported third-quarter financial results. The retailing giant earned $352 million, or $0.55 a share – a penny better than the year-ago quarter. As for revenue, it rose 2.8% to $17.73 billion.

It all sounds yawningly unimpressive. But when juxtaposed with estimates, the numbers were very impressive. Wall Street’s best and brightest collectively anticipated EPS of a mere $0.47 on revenue of $17.53 billion.

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On Wednesday, Target’s new reality was immediately priced into its market cap. Target shares were up as much $5, hitting a new 52-week high of $73 and change.

In drearier days, back in March, I recommended Target to High Yield Wealth readers. It was a tough sell. Target shares were trading somewhere in the mid-$50s. Over the previous 12 months, they had fluttered lower from a much higher perch.

Target had suffered a massive credit-card security breech during the Christmas shopping season. The company was struggling with slumping sales. An aggressive expansion into Canada was proving to be expensive. Few investors had Target in their sights.

But where most saw an intractable mess, I saw opportunity. Sure, Target was besieged with problems, but they were surmountable problems. Target appeared poised for a comeback. Management was foreshadowing as much with the dividend.

Target has always been a first-class dividend grower. The company has increased its dividend every year since 1972.

The annual increases usually came in double-digit increments. In the midst of the mayhem of early 2014, management increased the dividend again – by nearly 22%. No company increases its dividend 22% if it’s squeamishly pessimistic.

Of course, surmountable isn’t synonymous with easy or quick. Reversing the yearlong slump in store traffic required time and entrepreneurial ingenuity. Target needed to rediscover, or possibly reinvent, its niche. Change was necessary.

So change occurred.

Target’s board fired CEO Gregg Steinhafel, along with the head of the company’s Canadian operations. It hired industry veteran Brian Cornell as its new CEO. Cornell had headed PepsiCo’s (NYSE: PEP) Americas Food Division, Sam’s Club, and Michaels Stores (NASDAQ: MIK). Cornell was no stranger to the perils of competition and the need to innovate.

But the fact is that Target was already reassessing its operations before Cornell’s arrival. It spruced up its profitable baby department and added mannequins to its fashion areas. Cornell’s strategy is to amplify what is working by doubling down on high-profit areas like children’s products, fashion, and furniture.

To catch up with increasing web competition, Target has improved its online-shopping experience. It rolled out a service to enable consumers to order online and pick up goods at the store. It now employs individual stores to ship directly to online shoppers, thus lowering shipping time and cost.

As for the Great White North, Canada remains a drag on earnings and management time. That said, operations in Canada have improved ahead of the holiday season. Management has priced products more competitively and tailored inventory to local tastes.

I still like Target. I believe more share appreciation is in store. I’ll confess, though, that it’s somewhat less satisfying to jump on the bandwagon after shares have already increased 30%.

Then again, given the growth outlook, Target is still well worth the price.

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Published by Wyatt Investment Research at