Behind The Most Exciting Stock Pop In Years!

**Travis Hoium** (0:02)
Target's hot streak continues. Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Rachel Warren. Guys, we've got to start with retail. The big earnings report this morning was from Target. Company reported 5.3% increase in sales, 3.8% jump in same store sales. This is where they really struggled over the past few years. Rachel, what did you take away from this report?

**Rachel Warren** (0:31)
There were some interesting updates here. Probably the one that caught most investors' attention was the 100% jump in earnings per share. That really catches your eye, but you've got to look closely at the details. A large portion of that growth on the bottom line came from a one-time $994 million tariff refund. That actually added $1.65 per share to those earnings figures. But even if you strip away that, Target actually grew its fundamental earnings by 20% year over year.
They're really leaning into this differentiated retail approach. They've lowered prices on more than 10,000 items to try to attract more budget-conscious shoppers. But the broader story here is Target is really trying to expand more into the digital and service-based revenue channels. Their traditional in-store sales grew by 2.7 percent, digital sales grew by 8.7 percent. There's also a 25 percent increase in same-day deliveries, and 20 percent growth in non-merchandised revenue.
The thing that I think is important to note for anyone that's followed this business for a while, they've been struggling a lot compared to competitors like Walmart. Target really relies significantly on sales of more discretionary items compared to the competition. So apparel, home decor, seasonal goods to drive traffic and protect its margins. So when you've got shoppers cutting back on non-essential spending, that leads to lower foot traffic, excess inventory. So we have the newer CEO, Michael Fidelke. He stepped into the role earlier this year. They're implementing a multi-billion dollar turnaround strategy, slashing prices, they're investing billions into story models. This isn't a stock I'm running out to buy right now, but I will certainly say this was a quarter that I think showed some much needed improvement, particularly under new leadership.

**Travis Hoium** (2:08)
Yeah, Lou, I don't know if now is the time to buy because Target stock is almost up 60% year to date. It seems like a lot of the turnaround may have actually been priced in already.

**Lou Whiteman** (2:18)
Right. The patient has a pulse and congratulations for that because we didn't know that for a while. It was a beat. As Rachel said, it was an ugly beat, but at least things are not going down, which has been the problem for a while. As you said, the stock's up big, the market is yawning at this. I think that is right. What Target did was Target held serve, Target delivered as expected. Can they accelerate though? I mean, under 4% comp sales gains won't sustain the stock forever.
And what are they going to be? They were cheap chic or whatever, you know, like, and that's hard to do. They're trying to bring that back. They mentioned protein heavy potato chips as a big seller and a big driver and floral pattern phone.

**Travis Hoium** (2:59)
I gotta say, I do love all the minute details in these earnings calls too.

**Lou Whiteman** (3:03)
Right, right. But look, that sounds to me a lot like whack-a-mole. That doesn't sound like a sustainable strategy. Rachel mentioned they're going to differentiate themselves by lowering prices. Wal-Mart called, I think they've been trying that for a long time.
Target, this is the dangerous thing about retail. Nobody has just a God-given right to exist. We see retailers fall out of favor and never recover all the time. That's why it is really good news that they seem to have stopped the slide. But is it a good investment from here? I think they still have a lot of work to do to explain, like kind of the way Best Buy has explained, Dick's has explained, we are here because we provide blank. I still don't think we have the answer to that question for Target. I don't think floral pattern phone cases are the long-term answer there.

**Travis Hoium** (3:54)
When you think about a stock like Target, so 15.6 times earnings, as we're recording right now, it does have a dividend yield of about 3%.
Is that enough to be a value for investors or is the bigger challenge, what do they fundamentally become? Because the disruption story is still a bigger story. I think the digital piece is the one that I have the hardest time wrapping my head around. It makes sense that you could order your groceries. We get our groceries, non-perishable things. We usually get fruits and vegetables from the grocery store, but you need a box of cereal. It's cheaper to come from Target and it'll come right to your door. That seems compelling to me, but at the same time, Amazon's trying to do the same thing. It almost seems like they're in this strange middle spot.