Is It Finally Time to Buy Target Stock?

Target‘s (TGT 1.07%) stock jumped 11% on Aug. 21 after the retailer posted its second-quarter earnings report. Its revenue rose 3% year over year to $25.45 billion, exceeding analysts’ estimates by $240 million, as its comparable sales grew 2%. Its adjusted earnings climbed 42% to $2.57 per share and also cleared the consensus forecast by $0.39.

Target’s headline numbers were impressive, but its stock remains more than 40% below its all-time high from November 2021. Let’s see if this blue chip retail stock is finally primed for a rebound after its latest earnings beat.

Image source: Getty Images.

Why did Target’s stock drop over the past three years?

Target was one of the few big box retailers that survived the “retail apocalypse.” It kept pace with Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) by matching their prices, launching private label brands, and expanding its own e-commerce capabilities. It also successfully turned its own brick-and-mortar stores into a fulfillment network for its online deliveries and in-store pickups, since over 75% of the U.S. population already lived within 10 miles of its stores.

In fiscal 2020 (which ended in January 2021), Target’s revenue rose 20% as its comparable sales soared 19%. That acceleration was driven by its digital comparable sales, which surged 145% as more people shopped online during the COVID-19 pandemic. It maintained that momentum in fiscal 2021, but its growth stalled out in fiscal 2022 and fiscal 2023.

Data source: Target.

In fiscal 2022, Target struggled with persistent supply chain disruptions, inflationary headwinds for consumer spending, and tough comparisons to its pandemic-driven growth spurt. It marked down a lot of its merchandise as its growth cooled off and its inventory levels rose. But those steep discounts, along with its higher freight costs, crushed its gross margins.

That situation didn’t improve in fiscal 2023. Its growth was still throttled by inflation and competitive headwinds, and its slowdown was exacerbated by theft and safety issues and a conservative-led boycott in response to its Pride Month Collection. Its gross margin rose as its freight costs stabilized and it reduced its inventories, but it remained below its levels in fiscal 2020 and fiscal 2021. That’s why Target underperformed Walmart by such a wide margin over the past three years.

Is Target’s business finally recovering?

In the first quarter of fiscal 2024, Target’s comps declined 3.7%, but its gross margin rose 140 basis points to 27.7% as its cost improvements offset its markdowns. Those mixed results suggested the company wasn’t out of the woods yet.

But in Q2, Target’s comps finally rose 2% as its gross margin expanded 190 basis points to 28.9% and exceeded its pandemic-era highs. It expects its comps to grow about 0% to 2% in both the third quarter and the full year.

That outlook isn’t an all-clear signal, but it implies that Target passed its cyclical trough in fiscal 2023 and probably won’t become a late victim of the retail apocalypse like Bed Bath & Beyond. It attributes its slow but steady recovery to its double-digit growth in same-day delivery services, higher discretionary spending (especially in apparel and beauty products), upgrades for its in-store shopping experience, and strategic price cuts for thousands of everyday items. It also made progress in countering theft by shuttering some of its troubled stores, locking up some items, and hiring more security guards.

Target is still expanding its brick-and-mortar footprint even as it prunes its weaker stores. It ended Q2 with 1,966 stores, compared to 1,955 stores a year ago and 1,897 stores at the end of fiscal 2020. It’s generally a good sign when a retailer can keep opening new stores as it grows its comparable sales and gross margins.

On the bottom line, Target expects its adjusted earnings per share (EPS) to grow 0% to 14% year over year in Q3 and 1% to 8.5% for the full year. That’s higher than its prior full-year outlook for a 4% decline to 7% growth. Analysts anticipate 4% growth.

Is it the right time to buy Target’s stock?

At $160, Target trades at just 17 times the midpoint of its adjusted EPS guidance for fiscal 2024. It also pays a decent forward dividend yield of about 3%, and it’s a Dividend King which has raised its payout annually for 53 consecutive years.

Therefore, Target looks like a safe stock to buy again at these levels. It probably won’t revisit its all-time highs anytime soon, but its stabilizing growth, low valuation, and reliable dividends should limit its downside potential in this volatile market.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.