TGT Anxiety and the Future of Retail

[Kerim]

On the one hand, I’m excited about the drubbing that TGT’s stock price has been taking lately. On paper it remains a very strong dividend growth stock, and this is an opportunity for me to add to my partial position at much better prices. TGT hasn’t seen the 3 percent yield mark in a long time, and has a dividend growth streak to envy. Earnings are not in great shape at the moment, and as a result, the payout ratio is increasing. It is still south of 60 percent, though. I would be very surprised if TGT did not provide a dividend raise in Q3 to keep the streak alive, but I suspect it will be a pretty small raise, especially compared to the very large ones in recent years. Even if they only raise by a penny, though, (from 43 cents to 44 cents per share per quarter), that would represent a better than 10 percent raise year over year (as a residual result of the very large raise in 2013). If this were a consumer staples company, I’d be loading up with little reservation, on the faith that the recent stumbles are temporary and that the ship will be righted. Earnings will get moving in the right direction again, and we will remember this stretch as a great entry point.

But on the other hand, I’m having a bit of a crisis of faith about retail stocks right now. I don’t think TGT is going bankrupt any time soon, but I think the headwinds against bricks and mortar retail are getting stronger, and will only increase as the years roll by. TGT has lost traffic for six quarters in a row, and online sales generally (not TGT) are increasing steadily. Sure, WMT and TGT could improve their online presence, but I don’t think there is a chance in hell that either of them could catch Amazon, or even slow it down. This should not scare me out my holdings in the short or medium term, but I am trying to construct a portfolio that will weather the seas for decades to come. I’m just not sure that bricks and mortar retail stocks are a great long-term holding.

The names I hold at the moment that are suspect on the basis of this thinking are TGT, WAG, O, and ARCP. Together, those four names make up about 9 percent of my portfolio. I’m not planning to sell anything, but I think I’ll be very hesitant to add to this segment until I can get more comfortable about long-term prospects. The exception would be where a solid company is looking clearly undervalued. TGT’s share price is in much nicer (that is, lower) territory than in the recent past, but with a P/E in the high teens, it is not a screaming bargain.

What do you all think?

[fiveoh]

(05-21-2014, 04:59 PM)Kerim Wrote: On the one hand, I’m excited about the drubbing that TGT’s stock price has been taking lately. On paper it remains a very strong dividend growth stock, and this is an opportunity for me to add to my partial position at much better prices. TGT hasn’t seen the 3 percent yield mark in a long time, and has a dividend growth streak to envy. Earnings are not in great shape at the moment, and as a result, the payout ratio is increasing. It is still south of 60 percent, though. I would be very surprised if TGT did not provide a dividend raise in Q3 to keep the streak alive, but I suspect it will be a pretty small raise, especially compared to the very large ones in recent years. Even if they only raise by a penny, though, (from 43 cents to 44 cents per share per quarter), that would represent a better than 10 percent raise year over year (as a residual result of the very large raise in 2013). If this were a consumer staples company, I’d be loading up with little reservation, on the faith that the recent stumbles are temporary and that the ship will be righted. Earnings will get moving in the right direction again, and we will remember this stretch as a great entry point.

But on the other hand, I’m having a bit of a crisis of faith about retail stocks right now. I don’t think TGT is going bankrupt any time soon, but I think the headwinds against bricks and mortar retail are getting stronger, and will only increase as the years roll by. TGT has lost traffic for six quarters in a row, and online sales generally (not TGT) are increasing steadily. Sure, WMT and TGT could improve their online presence, but I don’t think there is a chance in hell that either of them could catch Amazon, or even slow it down. This should not scare me out my holdings in the short or medium term, but I am trying to construct a portfolio that will weather the seas for decades to come. I’m just not sure that bricks and mortar retail stocks are a great long-term holding.

The names I hold at the moment that are suspect on the basis of this thinking are TGT, WAG, O, and ARCP. Together, those four names make up about 9 percent of my portfolio. I’m not planning to sell anything, but I think I’ll be very hesitant to add to this segment until I can get more comfortable about long-term prospects. The exception would be where a solid company is looking clearly undervalued. TGT’s share price is in much nicer (that is, lower) territory than in the recent past, but with a P/E in the high teens, it is not a screaming bargain.

What do you all think?

One word sears

[earthtodan]

Agreed, and I have no brick & mortar retail in my portfolio, although my definition is not strict. I don't think Amazon will replace groceries and restaurants, so I bought a bit of WFM yesterday after the pullback. I think people like to pick out their own vegetables (I do, at least). I hold CVS, which is expanding into low-level healthcare services. And I own SBUX, which should be Amazon-proof. I will be endlessly amused if I start seeing hot cups of coffee flying around my neighborhood on drones being delivered to people's doorsteps, but I'm betting that will not come to pass.

[hendi_alex]

I'm not sure what it meant, but one blip on Bloomberg a while back mentioned that TGT had outsourced its online business to a third party. If TGT doesn't buy fully into developing its online presence to its maximum potential, IMO they are doomed to shrivel and become irrelevant. At this point, if the comment was true as taken by me, then Target is already far behind the game of the most aggressive, most successful on line retailers.

[Jimbo]

TGT sure is starting to look attractive to me.

A couple more pullbacks and I will probably pull the trigger on it, though I dont see it losing much more ground.

Ohhh, the question is pull the trigger now, or wait a little more??

Jim

[Kerim]

(05-21-2014, 04:59 PM)Kerim Wrote: Sure, WMT and TGT could improve their online presence, but I don’t think there is a chance in hell that either of them could catch Amazon, or even slow it down.

Or.... I could be entirely wrong about that....
Wal-Mart Zings Mexico E-Commerce, Dominates Retail Market

[Dividend Watcher]

(05-21-2014, 04:59 PM)Kerim Wrote: I’m just not sure that bricks and mortar retail stocks are a great long-term holding.

Kerim, this thought has passed through my mind in the past and I've thought about this more since you posted it.

First, Target is NOT Sears. The comparison is almost ludicrous. Target has a management team that seems to be proactive both in management of the business and in rewarding shareholders. Sure they've stumbled both with the data breach fiasco and with judging what consumers want which, to me, is the holy grail of retail. There are hundreds of retailers that make that mistake every day. Sears, or should I say Eddie Lampert & his cronies, has done what with their household "gold standard" brands, Craftsman, Kenmore and Diehard and with their ubiquitous locations? Lampert & Co. has become, to me, the poster child for binding "Say on Pay" rules and barring institutions from voting shares without their beneficial shareholders proxy.

Second, what prevents TGT from finding the right programmers to boost their online presence and compete on better terms than they do now? I've shopped Amazon and I see nothing special to their ordering process compared to several other retailers and my business distributors. I also find it hard to believe that we'll all be sitting in front of our computers ordering everything we need from Amazon and having it drop from a drone out of the sky for free.

Third, I still don't think we are in a normal retail economy yet. The income gap and the slowly developing recovery from both a financial and housing collapse still are having a lingering effect on both business and consumer spending patterns. Perhaps it has changed forever and retail businesses will have to use a new strategy.

That being said, changing strategy, revamping a business or restructuring an operating corporation, especially one the size of Target, does not happen over night, in a week, a month and probably not even within a year or two. There will be stumbles along the way as consumer choices zig as you zag trying to hit the target (pun intended ).

So, I guess you have to decide whether you think it's worth your time and patience to remain invested or to increase your investment. Do you think the dividend growth streak can continue? Can management right the ship in an acceptable period of time? Are you patient enough for them to do it? What was your initial thesis for investing in TGT?

I don't own TGT although I do own ROST for my own reasons which are not relevant to your choice. Good luck deciding what to do.

[Kerim]

Thanks very much for the detailed thoughts, DW.

I don't think Target is even in the same ballpark as Sears. I think that except for my long term concern about headwinds for brinks and mortar retail, I'd be loading up on TGT shares as one of the more obvious opportunities among DG stocks right now. There's little you could do to convince me to even give shares of Sears a look.

I think that the headwinds that I mentioned are real, but I don't yet know what weight to give them. If they are of small magnitude and it will be a slow, decades-long movement, then there should be little hesitation to take advantage and load up at these depressed prices. If the shift to online is stronger and faster, then I might be inclined to not add to my bricks and mortar retail at all.

I don't agree that TGT could just add some programmers and take any noticeable market share from Amazon. Amazon is light years ahead and they sell an array of products that Target could only dream of. People have a deep online relationship with Amazon.

Anyway, I'm still mulling all of this over. I am very tempted to grab more shares of TGT at the prices presented now, and if it goes lower still I'll be even more tempted (especially given the relative dearth of obvious opportunities). I suspect I am overreacting a bit about the online threat, but don't think it can be ignored either.

Thanks for helping me think it through.

[dividendventure]

This topic is very interesting for me. I've been looking to purchase WMT for a while now, and as they presented results their price dropped a little last week and so hit my target price.

The problem is, no matter how much I read, I couldn't fix this lack of faith in retail that you seem to be experiencing as well. Although after looking deeply into retailers, of all of them, WMT is the one who is getting properly ready for the e-commerce revolution and they have been seeing 30% Y-o-y growth on their E-commerce revenues. Meanwhile the competition is nowhere near close (Target) in terms of online capabilities. So, from my perspective, I wouldn't invest in TGT, even considering their track record. For me, the only valid player in this space at the moment is WMT.

The reason why I couldn't pull the trigger on WMT is that I saw SO MUCH negative feedback on the web about the way WMT treats employees and costumers and how they neglect stores and sell poor quality merchandise. I do not live in the US and so I never shopped at WMT, can any of you explain to me what is the situation of WMT in the US from the perspective of an investor? After seeing so much online hate, I could see people stopping buying groceries there just because it's now trendy to hate WMT. Is this the case?

[earthtodan]

dividendventure, you've touched on a topic that could turn political very fast. In my mind at least, there's an unspoken rule that we put politics aside to keep the discussion on track and to avoid causing rifts among members. That WMT is controversial doesn't necessarily make it a bad investment. I don't own it or follow it, and I'm agnostic to whether it is a good investment. For the purpose of this discussion, it is subject to the same headwinds as any other brick and mortar retail chain, although as you've pointed out they may be ahead of the curve in their online presence.

[EricL]

(05-27-2014, 03:20 AM)dividendventure Wrote: This topic is very interesting for me. I've been looking to purchase WMT for a while now, and as they presented results their price dropped a little last week and so hit my target price.

The problem is, no matter how much I read, I couldn't fix this lack of faith in retail that you seem to be experiencing as well. Although after looking deeply into retailers, of all of them, WMT is the one who is getting properly ready for the e-commerce revolution and they have been seeing 30% Y-o-y growth on their E-commerce revenues. Meanwhile the competition is nowhere near close (Target) in terms of online capabilities. So, from my perspective, I wouldn't invest in TGT, even considering their track record. For me, the only valid player in this space at the moment is WMT.

The reason why I couldn't pull the trigger on WMT is that I saw SO MUCH negative feedback on the web about the way WMT treats employees and costumers and how they neglect stores and sell poor quality merchandise. I do not live in the US and so I never shopped at WMT, can any of you explain to me what is the situation of WMT in the US from the perspective of an investor? After seeing so much online hate, I could see people stopping buying groceries there just because it's now trendy to hate WMT. Is this the case?

According to this article, Walmart has very good benefits. Walmart gets a bad rap but they actually treat their employees really well and provide upward mobility to those who are good workers.


Quote:
Through a company program, Walmart will offer a job to any qualified veteran who has been honorably discharged within the past 12 months. Since launching the initiative on Memorial Day 2013, Walmart has hired more than 30,000 veterans across the United States and projects that it will hire more than 100,000 veterans over the next five years. Interested veterans can find out more at http://walmartcareerswithamission.com.

Quote:
Walmart provides a benefits program to eligible full- and part-time associates. It also offers eligible associates matching 401(k) contributions of up to 6 percent of pay, discounts on general merchandise, a stock-purchase program and company-paid life insurance. Additionally, eligible associates receive a quarterly incentive based on store performance.

[rnsmth]

I am treating the share price decline of TGT as shallow risk at this point in time. Will continue to hold and reinvest dividends.