Can Target’s Future Earnings Justify Its Stock Price Spike?


Dec. 4 2020, Updated 10:53 a.m. ET

Returns on invested capital

Target’s (TGT) stock has risen 15.1% year-to-date (or YTD) to $83.60 as of March 30, 2016. Target’s stock price reacted positively to its fiscal 2016 earnings release on February 24 and the long-term guidance it provided at its annual Investor Day on March 2.

At its 2016 Investor Day, Target projected industry-best after-tax returns on invested capital (or ROIC) in the future, based on its projections for earnings growth. Earnings per share are expected to rise by at least 10% per year in the future, spurred by profitability enhancements and the company’s program of share buybacks.

The sale of its pharmacies and clinics to CVS Health (CVS) should also provide a margin upside. Target envisions a 50 basis point improvement to ROIC due to the CVS transaction.

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Total returns performance

Total returns on the company’s stock including dividends are at ~16.1% YTD. In contrast, the SPDR S&P Retail ETF (XRT) has returned 7.3% YTD.

Target and most of its peers, including Walmart (WMT), Dollar General (DG), Dollar Tree (DLTR), and Burlington Stores (BURL), have outperformed the broader S&P 500 Index’s (XPY) (IVV) (VOO) 1.6% YTD return in 2016. However, warehouse club operator Costco Wholesale (COST) has returned -2.2% YTD, lower than the broader S&P 500 Index.


Many expectations appear to have been built around Target’s stock price recently. The retailer was one of the few companies in the sector to have outperformed expectations so comprehensively in the fourth quarter, which includes the critical holiday selling season. While the company’s business fundamentals are strong, it may still need to contend with a competitive retail environment, a possible slowdown in the US economy, and execution risk.

In the next two articles, we’ll do a review of Target’s strengths, weaknesses, opportunities, and threats.


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