Is an Outperform in Target’s Future?

With shares of Target (NYSE:TGT) trading around $58, is TGT an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Target operates general stores in the United States as well as online where it sells merchandise at discounted prices. It operates in three segments: U.S. Retail, U.S. Credit Card, and Canadian. Target’s online presence is designed to enable consumers to purchase products either online or by locating items in one of its stores with the aid of online research and location tools. Groceries, clothing, household items, and general merchandise can be found at Target, making it an efficient shopping experience for consumers throughout the nation.

Target is looking to dig deeper into the health and wellness market now that more and more consumers seek to live healthier lifestyles. Fierce Retail reported Thursday that the retailer is partnering with seventeen existing brands to expand its line of natural, organic, and sustainable products it calls “Made to Matter – Handpicked by Target.” Featuring 120 products that are sold exclusively at Target, the company is collaborating with a number of different vendors including Method cleaning products, Chobani Greek yogurt, and Burt’s Bees health and beauty products. Back in January, Target already launched the Simply Balanced collection in its food section, which is a new organic and natural store brand, but now, Target is extending its natural offerings beyond food, and marketing baby, beauty, grocery, healthcare, and household items under the Made to Matter label. According to Fierce Retail, prices on the products will range between $1.99 to $24.99 and the featured goods will be displayed in aisles that highlight the new Made to Matter logo.

Many analysts expect the new line to facilitate significant success for Target, as more consumers are now interested in buying more natural and organic goods, and while those products used to be exclusive to specialty stores like Whole Foods (NYSE:WFM), Target may soon realize success by selling them exclusively at a lower price point. According to Forbes, Kathy Tesija, executive vice president of merchandising and supply chain, explained at a Target meeting this week that natural, organic, and sustainable products are growing at a 15 percent to 20 percent rate at the retailer, and that compares to the 10 percent industry average. In addition, because most Target shoppers (97 percent) already buy at least some natural, organic, or sustainable products at the retailer, executives believe they will buy even more when given the opportunity.

T = Technicals on the Stock Chart are Mixed

Target stock has struggled to make significant progress over the last couple of years. The stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Target is trading between its rising key averages which signal neutral price action in the near-term.

TGT

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Target options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Target options

19.01%

46%

44%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Target’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Target look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-44.9%

-43.75%

-10.38%

-25.96%

Revenue Growth (Y-O-Y)

-5.32%

1.95%

2.01%

-0.95%

Earnings Reaction

7.04%

-3.45%

-3.6%

-4.01%

Target has seen decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have been pleased with Target’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Target stock done relative to its peers, Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Kohl’s (NYSE:KSS), and sector?

Target

Wal-Mart

Costco

Kohl’s

Sector

Year-to-Date Return

-7.02%

-2.96%

-5.88%

-5.07%

-4.23%

Target has been a poor relative performer, year-to-date.

Conclusion

Target operates discount general stores across North America where consumers continue to enjoy their shopping experience. Fierce Retail reported Thursday that target is partnering with seventeen existing brands to expand its line of natural, organic, and sustainable products it calls “Made to Matter – Handpicked by Target. The stock has struggled to make significant progress and is currently pulling back. Over the last four quarters, earnings have been decreasing while revenues have been mixed, which has left investors pleased. Relative to its peers and sector, Target has been a poor year-to-date performer. WAIT AND SEE what Target does the rest of this quarter.

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