Is Target Still Misunderstood by Investors?

Wells Fargo has highlighted several misconceptions about Target and its e-commerce operations.

Having a weak e-commerce department might have been true of Target in the past. The retailer chose Amazon to operate its website for years, and then the company endured a rocky transition as the site was brought in-house. As a result, Wells Fargo thinks that Target has made significant strides catching up, and this is underappreciated by Wall Street.

The brokerage firm expects this message to be more pronounced come Target’s analyst day on March 3.

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Wells Fargo listed its five key misconceptions about Target as follows:

• Target is not investing enough in e-commerce or key talent. In fact, Target spent more than $1 billion each year on e-commerce in 2012 and 2013, which was more as a percentage of capital expenditures than any other retailer in Wells Fargo’s coverage universe
• Shipping is too slow and Target lacks omnichannel innovation. According to StellaService, Target shaved nearly two days off its average shipping speeds in 2014.
• Prices are too high. Pricing studies are difficult to execute, given that many factors can influence the outcome. A Bloomberg study from November found less than a 2% difference between a basket of toys from Amazon.com Inc. (NASDAQ: AMZN), Wal-Mart Stores Inc. (NYSE: WMT) and Target.
• Target’s mobile offering is not that great. In fact, Target’s Cartwheel app is the fourth most popular e-commerce app behind Amazon, Groupon and Walgreens, according to AppAnnie and Internet Retailer.
• Target’s website is subpar relative to peers. The average response time has gone from 2.87 secs. in 2012 to 1.94 currently, and site availability has gone from 98.7% to 99.8%, and consistency from “Poor” to “Fair,” according to Internet Retailer.

The brokerage firm gave its valuation range as $83 to $88. This was based on a both a price-to-earnings (P/E) valuation and a five-year discounted cash flow analysis. Risks to this valuation include consumer spending, slowing or declining industry growth, and an improving competitive landscape.

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Shares of Target were up more than 1% Tuesday at $76.30. The stock has a consensus analyst price target of $74.17 and a 52-week trading range of $55.25 to $77.75.

If you look at a stock performance screen comparing Target to Amazon and Wal-Mart, Amazon is leading the way so far in 2015 with year-to-date gains of 19%. Still, Target is the winner by far over the trailing 52-weeks with a gain of 38% — versus only 2.6% for Amazon and 19% for Wal-Mart.