Target (NYSE: TGT) made headlines when it recently announced that it will launch a paid membership program in early April, a bold move that many saw as an attempt to compete directly with other retail giants, Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT), and their subscription services, Amazon Prime and Walmart+.
But, that’s not all, as TGT stock jumped by a whopping 12% after it reported earnings that beat Wall Street’s expectations, and more and more bulls are charging in, showing their confidence in Target’s future.
Target Circle 360
Target is determined to increase customer loyalty by introducing Target Circle 360, its subscription-based program. This program will include a lot of perks, but the main one is free unlimited same-day delivery for orders over $35, in as little as one hour with no delivery fees. Additionally, the program will offer updates to Target’s Circle card, which takes an extra 5% off customers’ purchases, includes free two-day shipping, and allows extra time to make returns.
The program will cost $99 per year. But, Target said that it will offer a discounted price of $49 per year as part of a promotion that starts from the program’s launch and ends on the 18th of May. Along with that, the discount will continue to be offered to Target’s credit card holders after that.
The Retail Showdown
With a subscription program, Target is set to follow in the footsteps of its competitors, Amazon and Walmart, who have turned membership fees into a source of significant revenues, meaning that if Target’s subscription plan works out, the company could bring in a lot of money from it.
For example, Amazon Prime generated $40.2 billion in revenue for Amazon in 2023, while Walmart+ generated $2.6 billion for the company. Even though it’s currently unclear how many people would sign up for Target’s paid tier, the free Target Circle membership has more than 100 million members, according to the company. Therefore, even if just 10% of the free tier members sign up for the paid tier, that’s ten million people, and if they all pay $99 per year, that’s an extra $990 million per year. While Amazon has an advantage because it’s available in multiple countries worldwide, Target beats it when it comes to price because Amazon Prime costs $139 per year for perks like free two-day delivery and access to Prime Video, but if people can pay less for Target and still get Prime Video for $8.99 per month, many customer might switch to save money.
On the other hand, Walmart’s Walmart+ costs $98 per year, and it offers perks like free shipping, free grocery deliveries for orders of at least $35, and gas discounts. Walmart has not said how many people subscribe to Walmart+, but its CFO, John David Rainey, said on the company’s earnings call in February that its membership continues to grow by double-digit percentages. In addition, Walmart’s CEO, Doug McMillon, told investors in February that Walmart+ members spend nearly twice as much as non-members and buy more over the course of a year.
With Amazon Prime and Walmart+ being so successful, it’s no surprise that Target’s CEO, Brian Cornell, said in a recent interview that the paid membership program will encourage customers to place more online orders with Target, and that the company did market research that showed that customers value delivery to their homes, even as they use curbside pickup more frequently. Home deliveries in the new program will be powered by Shipt, a membership-based company that Target acquired in 2017 for $550 million, and Shipt works similarly to how other gig-economy companies like DoorDash do, by relying on independent contractors who receive the products and get them to customers’ doors.
Target’s Earnings
Target Circle 360 is part of Target’s larger plan to diversify its revenue streams amid weaker sales. Even though the company’s Q4 earnings and revenue beat the expectations of Wall Street analysts, they were still underwhelming as the company’s comparable sales have declined three quarters in a row, and yet, the company’s stock jumped 12% after these lackluster earnings.
If you were just looking at the surface numbers of Target’s most recent earnings, you’d think that this was a pretty bad report from the company as the company finished its first fiscal year with declining sales since 2016 as comparable sales fell 4.4% in Q4. But, if you actually take a step back to really take a look at Target, you’d see that the company actually saw very strong growth over the past few years as it gained a lot of market share during the pandemic, as its revenue jumped from $77 billion in 2020 to $92 billion in 2021, and then to $104 billion in 2022.
Unfortunately for Target, the company got careless after it saw its success during the pandemic years, and ended up stocking up on inventory it couldn’t sell effectively, and failing to cope with the supply chain issues that were rife at that time. Now, it seems like the company learned from its mistakes and what’s happening with Target right now is that the company is giving back some of the massive market share it acquired in the pandemic to return to normal, so this will likely end soon and Target will go back to same store sales growth sometime after Q1 or Q2 of this year.
Therefore we can say that the reason why the stock increased is because investors think that Target’s profitability is finally stabilizing after several weak quarters. Also in Q4, revenue rose 1.7% to $31.9 billion, which beat the analysts’ estimate of $31.35 billion. But, that top-line gain can be credited to a quirk of the company’s calendar and it’s that its fiscal Q4 and year included an extra week compared to 2022.
Target also showed improvements in profitability after struggling with inventory mismanagement issues in earlier quarters, as its gross margin rose from 22.7% to 25.6%, thanks to lower expenses related to freight and supply chain, and its operating margin also improved and went from from 3.7% to 5.8%. As a result, the retailer finished the quarter with an EPS of $2.98, up 57% year-over-year, and way ahead of the estimated $2.40. The company’s position could benefit even more when it introduces its subscription service, especially since it’ll be taking away home delivery fees by dealing through Shipt, so it can easily rev up its e-commerce business, which is really needed since digital sales have declined every quarter for the past year, and dropped 0.7% year-over-year in Q4.
And the paid membership program isn’t the only thing that Target is doing to keep its shoppers and compete with other retail giants. In fact, the company is relaunching its free Target Circle loyalty program and credit card to make them easier to use and more personalized. For example, members who are on the free program will have discounts automatically applied when they’re shopping, rather than having to scan through deals on the app.
TGT Stock Forecast
Target is currently demonstrating that it can deliver solid profits even in times of weaker demand, and that resulted in investors applauding its better-than-expected results. Looking ahead, the company anticipates a 3% to 5% comparable sales decline in 2024’s Q1, and an EPS in the range of $1.70 to $2.10, compared to its EPS of $2.05 in Q1 2023, and much worse than analysts’ estimate of $2.09.
While this guidance isn’t really good, it’s safe to say that more pessimism had been priced into TGT stock than was deserved. Still, the company must return to meaningful top-line growth, which will be critical for a full recovery in the stock price, and maybe the Target Circle 360, as well as the decline in inflation, will help it do that. TGT stock might provide a great investment opportunity right now, especially before the launch of the subscription service.
Additionally, if you’re a dividend investor, then you should know that TGT stock will likely raise its dividend soon, and it has a streak of dividend raises that’s 52 years long. Since it’s improving its fundamentals, it’s almost guaranteed that Target will maintain its dividend growth streak this year, and this would be a very good move for TGT stock investors, as the payout is already a comparatively high yielder at nearly 3%, which is more than double the average percentage on the S&P 500 index.
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