Can Target (TGT) survive inflation?

Rising inflation is hitting Target (TGT) hard. To elaborate, inflation threatens Target’s low-price business model in two ways.

First, inflation forces Target (NYSE: TGT) to raise prices by increasing operating costs. In particular, energy costs which are rising faster than other prices. Trading Economies estimates the US energy inflation rate for May 2022 was 34.598%. Energy costs were significantly higher than the overall US inflation rate for May 2022, which was 8.6%.

Rising energy inflation increases Target’s operating costs such as fuel for trucks and electricity and heat for stores. Energy costs are one expense Target has to pay and pass onto consumers.

How Inflation Hurts Target

Second, inflation decreases the demand for luxury goods and big-ticket items such as electronics. To elaborate, people buy fewer big-ticket items because inflation forces them to pay more for everyday purchases.

Target (NYSE: TGT) is one of several retailers facing a glut of excess inventory, Bloomberg reports. To explain, Target orders new merchandise several months ahead of time.

Hence, Target ordered large amounts of merchandise several months ago when consumers had more buying power because of lower inflation. Notably, the average US inflation rate was 4.7% in 2021.

Now Target has many items consumers are not buying, including televisions, patio furniture, bedding, some clothing, and kitchen appliances. Those items cost money because Target had to pay for them and pay to store them.

The Inflation Danger to Target

One danger is that inflation could force Target (TGT) to sell goods at a loss just to get them out of the stores. Notably, Target was advertising up to 40% off on headphones and speakers and up to 25% off on TV sets and computers on 15 June 2022. Plus, Target was offering 40% off on fake plants on 15 June 2022.

Other products Target could have trouble moving include higher priced foods and alcohol. Buyers will switch to cheaper items to save money. A consumer could buy the house brand of soup instead of Campbell’s, for example.

Target Chief Financial Officer Michael Fiddelke says the company needs to move merchandise to keep space in stores and fulfillment centers available. Hence, Target has to sell some items at a loss.

Is Target (TGT) making money?

Target (TGT) is making money despite inflation. For instance, Target reported quarterly gross profit of $6.108 billion and a quarterly operating income of $1.346 billion on 30 April 2022.

Yet, Target is making less money. The quarterly gross profit fell from $7.63 billion on 31 January 2022. Plus, the quarterly operating income fell from $2.095 billion on 31 January 2022. Similarly, the quarterly gross profit fell from $7.099 billion on 30 April 2021 and the quarterly operating income fell from $2.374 billion on 30 April 2021.

Conversely, Target’s revenues are growing. The quarterly revenues grew from $24.197 billion on 30 April 2021 to $25.17 billion on 30 April 2022. Interestingly, the quarterly revenues rose from $30.996 billion on 31 January 2022.

Target’s revenues grew by 4.021% in the quarter ending on 30 April 2022. The quarterly revenue growth rate fell from 9.38% on 31 January 2022 and 23.36% on 30 April 2021.

Thus, Target’s business is growing while it is making less money. Hence, I think Target will have to cut expenses, close stores, or limit growth to survive.

How Much Cash is Target Generating?

Target (TGT) is burning cash. For instance, Target reported a quarterly operating cash flow of -$1.394 billion on 30 April 2022. The quarterly operating cash flow fell from $3.028 billion on 31 January 2022 and $1.139 billion on 30 April 2021.

In contrast, the quarterly ending cash flow rose from $158 million on 31 January 2022 to $1.112 billion on 30 April 2022. Notably, the quarterly ending cash flow was $7.816 billion on 30 April 2021.

Target still generates cash. Appealingly, Target is paying debts. It reported a quarterly financing cash flow of -$2.457 billion on 30 April 2022. Target reported seven straight quarters of negative cash flows ending on 30 April 2022. That shows Target is paying debts.

Target has More Debt and Less Cash

Conversely, Target’s debts are growing. The total debt grew from $15.245 billion on 30 April 2021 to $17.322 billion on 30 April 2022. Hence, Target has more debt in a period of rising inflation.

Moreover, Target (TGT) has far less cash. Target’s cash and short-term investments fell from $7.816 billion on 30 April 2021 to $1.112 billion on 30 April 2022. Target lost most of its cash and accumulated more debt over the past year.

Target’s value increased slightly in the same period. Target had $50.471 billion in total assets on 30 April 2021 and $50.842 billion in total assets on 30 April 2022.

What Value does Target (TGT) have?

Mr. Market has noticed Target’s vulnerability to inflation. Target’s share price fell from $219.25 on 16 May 2022 to $147.44 on 15 June 2022 to $139.30 on 17 June 2022.

In contrast, Mr. Market paid $231.26 for Target (TGT) on 16 June 2021. I think Target shows inflation can be deadly for retailers. Consequently, I think Mr. Market overpaid for Target at $139.90 on 17 June 2022.

Yet I consider Target a nice dividend stock because of the scheduled payouts. For instance, Target has scheduled eight $1.08 quarterly dividends through 10 June 2024. On 15 June 2022, Target shares were offering a $4.32 forward dividend and a 3.1% forward dividend.

If you are looking for a cheaper dividend stock in retail. I consider Target worth watching because of the dividends. However, I expect Target’s share price and business will shrink over the next few years. Investors need to be skeptical of Target (TGT).

My suggestion is to wait and see how far Target’s share price falls before buying it. Target still makes money and pays an attractive dividend, so it could soon become a bargain stock.

 Originally published at https://marketmadhouse.com on June 17, 2022.