Target’s (NYSE:TGT) stock soared by more than 12% after its recent earnings report. Shares are close to their 52-week highs and are up by more than 60% from 52-week lows. The main items that ignited the surge were the CEO’s comments about a return to growth and the company’s new membership plan that aims to rival Amazon (NASDAQ:AMZN) Prime and Walmart+ (NYSE:WMT).
However, I do not see Target’s new membership plan rivaling the industry giants, and the recent earnings pop was misguided. I am bearish on the stock, as long-term problems remain intact.
The New Membership Plan
The big headline for the Q4 earnings report was Target 360, the company’s new annual membership plan that comes to $99/year. The company is incentivizing early signups by lowering the price to $49/year for the first year for people who sign up between April 7th and May 18th.
The membership offers free same-day delivery for orders of over $35 through Shipt, its same-day delivery service, which has already been a part of the Target experience.
Most retailers have been late to the membership game. Amazon took everyone by surprise with a 2005 launch for its flagship Amazon Prime. Walmart followed suit more than a decade later with a Walmart+ launch in 2020.
Analyzing Financial Results for Walmart+
Walmart+ was released on September 15th, 2020, and capitalized on the firm’s 4,700 stores. That included roughly 2,700 stores with same-day delivery at the time of the membership’s launch. I looked back at Walmart’s Fiscal 2021 results to see what type of an impact Walmart+ had on total revenue.
Q2 of Fiscal 2021 (13-week period ended July 31, 2020)
- 5.6% year-over-year revenue increase
- 97% year-over-year U.S. e-commerce growth
This quarter takes place just before Walmart+. It’s important to remember that lockdowns were in full effect in this quarter, which explains the 97% jump in e-commerce sales.
Q3 of Fiscal 2021 (13-week period ended October 30, 2020)
- 5.2% year-over-year revenue increase
- 79% year-over-year U.S. e-commerce growth
Walmart+ was rolled out on September 15th. That’s the middle of the quarter, which didn’t give it enough time to have a meaningful impact.
Q4 of Fiscal 2021 (13-week period ended January 29, 2021)
- 7.3% year-over-year revenue growth
- 69% year-over-year U.S. e-commerce growth
This is the first quarter that included Walmart+ from the start. E-commerce growth continued to decelerate despite the recent introduction of Walmart+, while overall revenue growth experienced a slight bump. Then, growth slowed down sharply in Q4 of Fiscal 2022, as revenue inched up by 0.5% year-over-year over that span. Walmart recently rolled out its advertising segment, which kept revenue growth afloat.
Going Full Circle Back to Target
Walmart didn’t experience dramatic growth because of Walmart+. Even now, investors have come to expect revenue growth ranging from 5-8% year-over-year from America’s largest retailer.
Walmart didn’t have as much competition. Amazon was the big player, and it’s also important to keep Costco (NASDAQ:COST) in mind due to its membership program. However, each additional corporation creates more saturation.
Walmart wasn’t able to pull off substantial revenue growth from its membership plan, and Target is even less likely to pull it off, and its offer lacks differentiation. Do people need to pay for another annual subscription that offers free two-day shipping and free same-day shipping in some scenarios?
Target fanatics will probably pick up the membership, but that’s not going to make a major impact on earnings. The company currently generates a little over $100 billion per year. The company needs 10.1 million members to generate $1 billion in annual membership fees. Even if the company achieves that number, it’s only a 1% year-over-year revenue increase.
Investors can make the argument that these members will buy more frequently from Target. However, we haven’t seen meaningful growth rates from Walmart. The company maintained growth rates rather than reaching consistent double-digit revenue growth rates.
Amazon and Walmart are also better at what they do. Walmart has more stores, while Amazon offers additional perks, such as streaming, to its members. Walmart also has a growing advertising segment, while Target can’t say the same.
Is TGT Stock a Buy, According to Analysts?
Target is currently rated as a Moderate Buy based on 19 Buys, nine Holds, and zero Sell ratings. The average TGT stock price target of $176.81 implies 5.5% upside potential. Analysts have been reiterating their price targets or raising them in response to Target’s earnings report.
The Bottom Line on Target Stock
The upward price movement for Target stock does not make sense, given its long-term fundamentals. The company only grew revenue by 1.6% year-over-year in Q4 2023. Net income jumped by 57.8% year-over-year, thanks to significant cost-cutting that isn’t sustainable in the long run. Significant cost cuts without rising revenue can make future growth even more difficult.
Even with the membership launch on the way, the firm anticipates a year-over-year comparable sales decline ranging from 3% to 5%. GAAP EPS is expected to reach $9.10 at the midpoint, which is a 1.8% year-over-year increase from the 2023 full-year GAAP EPS of $8.94.
I’m not signing up for this “growth” narrative. The rally since mid-November has been nice for patient investors who held during challenging times. However, the company is bound to face more challenges in the upcoming quarters that will bring its valuation and long-term growth opportunities into question.
