Don’t Target This Stock

[View in browser]( [The Spill Logo] Proprietary Data Insights Financial Pros’ Top Discount Stores Stock Searches in the Last Month Rank Name Searches #1 'Target Corp 412 #2 'Dollar General Corp 267 #3 'Costco Wholesale 257 #4 'Wal-Mart Stores 171 #5 'Dollar Tree Inc 56 #ad [Become a better investor in just 5 minutes a day]( Brought to you by [Masterworks]( [Investors earn 325% annualized return here (really)]( [Masterworks - Investors earn 325% annualized return here (really)]( While the ultra-rich have been banking off this under-the-radar asset for centuries, a group of everyday investors just used it to rake in a whopping 325% annualized gain. Sounds nuts? It definitely is. But it's also 100% true. The asset was a sculpture offered by the fractional art investment platform Masterworks. After just 36 days, investors were able to profit for a 15.4% net gain, a triple-digit return on an annualized basis. While it’s not common for Masterworks to get a profitable exit that fast, every one of Masterworks’ 12 exits has returned a profit to investors, totaling more than $30 million in payouts. The Spill readers can use [this exclusive link to skip the waitlist](. [Skip the Waitlist]( *See important Regulation A disclosures at [masterworks.com/cd](. Don’t Target This Stock TrackStar is pretty impressive abilities when it comes to picking up on financial pros' stock research trends that others might miss? Well, recently, it pulled our attention to Target (TGT) when search volume surged on June 1st. This was quite peculiar since Target's earnings had already been released the week prior. We couldn't help but wonder why there was such a sudden interest in Target, especially considering that the stock has gone down by 16.6% this year and more than 50% since the end of 2021 – a significant move for a stock of this magnitude. So, we delved into the news and data to investigate if something had changed that we might have missed. Target’s Business From the northern headquarters of Minneapolis, Minnesota, Target Corporation is one of the largest discount retailers in the United States, with a presence in all 50 states and the District of Columbia. It operates nearly 2,000 stores that offer a wide range of products, from groceries and essentials to clothing and electronics. Plus, it owns Shipt, a same-day delivery service, and Roundel, a media company. Target is known for its unique assortment of owned and exclusive brands, such as Good & Gather, Cat & Jack, Opalhouse, and Hearth & Hand with Magnolia. It also partners with leading national brands and collaborates with celebrities and designers to create exclusive collections. Surprisingly, the company’s sales are pretty evenly spread amongst the different categories: [Sales] Source: Target 2022 Annual Report The company owns three stores: - Target: The largest and most profitable, accounting for more than 90% of the company’s revenue and operating income in 20202. - Mervyn’s: Moderately-priced department stores that sell apparel, accessories, shoes and home goods. - Marshall Field’s: Traditional department stores that sell upscale apparel, accessories, cosmetics and home furnishings4. Target’s stock is down a whopping +50% since 2021. According to Wall Street analysts, some of the reasons for the stock's weakness are: - Competition from other retailers, especially online players like Amazon and Walmart that are investing heavily in e-commerce and delivery capabilities - Supply chain disruptions caused by the global pandemic, labor shortages, port congestion, and rising transportation costs have affected Target's inventory levels and margins - Inflation pressures have increased the cost of goods and services for both Target and its customers, potentially impacting its sales and profitability Early in the pandemic, Target struggled to keep up with demand. Now, it is stuffed with inventory, forcing it to markdown stock, hurting its profitability. Financials [Financials] Source: Stock Analysis While Target’s managed to keep revenues moving in the right direction, it’s margins have declined substantially. Gross margins dropped 5%, practically obliterating its free cash flow. At the moment, its operating cash flow is almost entirely eaten up by CAPEX, which is going to store remodels, new locations, building upstream inventory replenishment capacity, and ramping up its sortation center strategy. That’s meant no share buybacks last quarter, though management plans to keep its dividend in place. Target does carry a decent amount of debt at $18.9 billion. However, interest expenses are only $500 million which is quite low. Valuation [Valuation] Source: Seeking Alpha Compared to its peers, Target valued right in the middle. While it runs the cheapest price-to-cash flow ratio, its P/E ratio is just above Dollar General (DG), but below the others. Target does boast the lowest price-to-sales ratio, which is interesting given its ‘upscale’ brand. Overall, it’s cheap, but not as cheap as we’d like to see given the headwinds. Growth [Growth] Source: Seeking Alpha Target’s growth has been abysmal compared to its peers in recent years. Only when you look out 3-5 years does it become respectable. But on a forward basis, it’s forecast to have the lowest revenue and EBITDA growth in its group. Profitability [Profit] Source: Seeking Alpha Costco (COST) has one of the lowest gross margins. However, it’s SG&A are typically lower, giving it an EBIT margin on par with most of its peers. Notably, COST, Dollar Tree (DLTR), and Walmart (WMT) all boast positive free cash flow. TGT and DG do not. [It's time you learn about Alternative Investments!]( Real Estate.. Private Equity… Commodities.. They can help you make a fortune. But it’s hard to figure out which to invest in. Ready to learn how to take your investments to the next level? [Sign up for The Alt for FREE.]( Our Opinion 4/10 Shares of Target may be half what they were, but they still aren’t cheap enough. Consumer defensive stocks as a whole are expensive. Target’s the worst of the bunch…right now. We expect its investments will eventually pay off. But that will likely take well into 2025. 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