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Not too long ago, I took a cross-country trip to Florida.
I had to pick up a few items before departing, and it just so happened that a "Super" Target was right on my way. So, in the name of research and curiosity, I decided to check out the store.
It was Thursday, around 6 p.m., a time when my neighborhood supermarket is slammed and the mall is usually busy. (I only know this because I might have a small shopping addiction.)
As I walked through the cavernous store, I passed 25 checkout stations that were almost completely devoid of activity. It felt a little like that Twilight Zone episode where a man finds himself completely alone in a normally bustling town. The lights were on... the music was playing... but there were no shoppers (or employees, for that matter) in sight.
After 15 minutes of strolling along aisles packed with goods designed by B-list TV stars, one thought nagged at my brain.
How is this company still in business?
I know that may sound a bit dramatic, but I've been following Target (NYSE: TGT) for more than a decade, and this has always amazed me.
And not in a good way.
Target's prices are far from cheap, and the selection and quality of the products it carries are pretty darn close to what you would see at Wal-Mart (NYSE: WMT), J.C. Penney (NYSE: JCP), Kohl's (NYSE: KSS) and others, but rarely discounted. Over the past five years or so, I started noticing the company's stores were practically devoid of consumers compared to its peers' stores of similar sizes.
But back to my shopping trip.
I took my few small items over to the 25 vacant checkout stations. As my cashier -- one of the two that were manning this massive store that day -- rang me up, she laughed with (or maybe at) me when the total came out to more than $100.
She said, "It's hard to spend less than a C-note when you come to Target."
What's funny (or not funny) is that I've always felt I've overpaid at this mini-department store. I would joke to friends that I went into Target to get suntan lotion, chocolate and water and somehow spent $100. They usually agreed and told me that's why they started going to Wal-Mart; for the past couple of years, I've avoided Target for the same reasons.
Consumers echo these sentiments across the web, as the company's high prices have become the "target" of many a meme. A 2016 study by Business Insider found that Target's grocery prices were actually 15% higher than Wal-Mart's.
But since I'm an objective guy and wanted to give TGT a fair evaluation before getting short, I decided to make stops at seven stores in the five states I was traveling through.
In each store I visited, I consistently saw high prices and low consumer traffic, further confirming the earnings and sales struggles the company is facing as a whole.
My Big Takeaway...
Target is a gigantic store filled with an overabundance of non-critical, not-so-well-priced goods.
And while shares have been suffering, they aren't in as bad a shape as I had expected. This is why I think it's the perfect time to look at put options.
Compared to their year-ago periods, Target's earnings have been down for the past two quarters. For the company's fourth quarter of 2016 (ended Jan. 28, 2017), Target's earnings fell 4.6%. Then, in Q1 2017 (ended April 29), they fell 6.1% year over year.
Some analysts are still bullish on the company, but their patience is wearing thin. The vast majority rate the stock a "hold" or "sell," but six of the 29 analysts following the company still believe the company could turn around. These six analysts would have also all been "buyers" back in December... They've since watched the shares fall more than 30%. I'd simply call them "wrong."
Target trades for 12 times expected earnings for this year, which isn't cheap. Competitors Kohl's and J.C. Penney both trade around 10 times earnings.
"Why Are You Special?"
This is the question that retailers (online and brick) need to be asking themselves.
Are they the cheapest in the land? Do they have the best selection of goods for one-stop shopping? Do they have free shipping? Do they sell brands and items that cannot be found anywhere else? Do they make the majority of sales online and at low cost?
If a retailer can't answer a resounding yes to any of these questions, chances are it's going to have a tough time surviving the changes that are happening in retail.
But rather than trying to find the thing that makes the company special, Target's management is doubling down on "reimagining" and refurbishing hundreds of stores across the country... and spending hundreds of millions of dollars in the process.
In my opinion, that's kind of like completely refurbishing a car that's missing an engine. If the mass migration from all department stores to online shopping has taught us one thing, it's that consumers don't really care how pretty your store is.
Unfortunately, Target is more focused on implementing self-checkout lanes than it is on the one positive I see -- its half-decent internet sales growth.
Even though it was largely ignored during the latest earnings call, the company's internet sales have been growing in the double digits. However, Target still only generates 6.8% of its revenue from online sources; and that's a problem. Amazon.com (NASDAQ: AMZN) and Wal-Mart already control most of that market share, and I see no reason for consumers to suddenly start increasing their usage of Target's online platform.
The point here is that Target is still trying to save its failing brick-and-mortar business by blowing money on a new coat of paint instead of dedicating modest resources to its lower-margin online business.
Until Target takes some dramatic steps to change the way it sells to consumers (and I'm not talking about wood trim in its stores), it's likely to continue on the path of other stubborn retailers, like J.C. Penney (down 48% over the past year) and Macy's (down 29% over the past year).
Here's How We Can Profit
At the very least, TGT should be trading at its peer average, closer to 10 times forward earnings. Currently, analysts expect the company to earn $4.23 in 2018, which means a fair price for the company is about $42 a share. When you consider that 2019 earnings are projected to be even lower, the current price around $51 just seems way off.
Because we can leverage these moves (and I tend to err on the side of caution), let's split the difference and look for a target of $48 before the summer ends.
Now here's how my premium subscribers over at Profit Amplifier plan to profit from this drop...
When I issued the trade recommendation to my subscribers, that $48 target for TGT was about 5.3% below the current share price. Rather than tie up our trading capital and short the stock outright, we can use my simple options strategy (which you can read about here) to bet against the stock and magnify our profit potential.
All TGT has to do is fall to $48 by early fall. If it does, then we'll book an 18.6% gain instead of just 5%.
It's that simple.
All you need coming into this trade is an understanding of how options work -- and, more importantly, how the strategy we use at Profit Amplifier decreases some of the risks that are normally associated with options. If you'd like to expand your horizons and learn how to make dozens of simple, quick, profitable trades by using options, then I invite you to check out our service here.
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