Target Corp. does not, and has not, grown its profit. This year, it is expected to make about $2.4 billion. That is the same amount of profit that Target earned in the recession year of 2009. As recently as 2015, Target was earning $2.9 billion per year in profits. These downticks in profitability are even more concerning when you consider that Target is perpetually opening up new stores—the implication being that the same-store sales profits are declining at a greater rate than the amount of new profit generated by the new locations.
And yet, despite this absence of profit growth, Target stock (TGT) has managed to deliver earnings per share growth for its investors because it has systematically repurchased its own stock.
In 1999, each share represented 1/900,000,00th of the company. Today, each share represents 1/545,000,000th of the retailer’s overall profits. More recently, Target has reduced its share count by almost 60 million—that’s why earnings per share have grown from $4.27 per share to $4.50 per share over the past four years even though even though Target is earning $500 million in less profits per year than it used to.
It is something that is interesting to keep in mind as the “Amazon will kill everything” hypothesis has gradually converted to reality. Whether or not the retailers survive is entirely a function of the pace of change.
For the past decade, the pace of Amazon’s growth has not more than offset the pace with which Target has repurchased stock. Target made $3.30 per share in 2009 profits compared to $4.50 now, even though profits haven’t moved up over the course of the decade. The wealth has been created by buying out the other owners so your claim to the existing profit pie increases.
That is part of the reason why tobacco investors did so well. On average, in every year since 1982, Americans smoke about 3.5% less tobacco than the year previous. As a result, people dumped their tobacco shares and the price plummeted. Even as the regulations mounted, this pace of change was so slow that price hikes and share repurchases (coupled with dividend reinvestment) still led to future outperformance.
People predicting the inevitable demise of tobacco were right—what they missed was the slower-than-expected magnitude of the change. That is why future outperformance happened.
What is interesting about Target, and other major retailers as well, is that they all make dividend payments that consume about 40-60% of their overall profits. It is possible that, either by using the additional profits to reinvest or buy back large amounts of stock, retailers can prove to be fair (i.e. good but not great) investments.
Target is a useful life case study right now. The core business is not improving. There are slow store rollouts, and in a given year, the overall revenues and net profits either stagnate or decline a bit. But yet, Target is only paying out 45% of its current profits as dividends. And it is using the rest to repurchase its own stock. It’s a bizarre to fund real life examples of businesses that are creating some measure of sustainable wealth even while they decay.