Hit the Bull’s-Eye with Target Stock

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Like other retail store chains, Target (NYSE:TGT) has had to overcome inflation and a general sense that the U.S. economy isn’t in perfect condition. Consequently, while the Magnificent Seven technology stocks roared ahead in 2023, Target stock evidently got left behind.

Unlike Walmart (NYSE:WMT), Target has a specific problem as over half of its annual sales are in discretionary categories (toys, electronic gadgets, fashion items, etc.). Consequently, Target is particularly vulnerable when shoppers cut back on non-essential purchases during times of persistent inflation.

Perhaps this explains why the market dumped TGT stock yesterday, sending it tumbling 3%. However, if they had feared an imminent, disappointing earnings report, then today’s stock traders may be in for a positive surprise from Target.

Is Target stock “deal-worthy”?

Target is known for providing good deals on a variety of products. In that vein, the company introduced its Dealworthy campaign in February, offering nearly 400 deals on basic items. Some of these products cost less than $1, and most of them are under $10.

In other words, Target is being proactive in addressing consumers’ concerns about inflation. Yet, that’s not the only likely reason the big-box retailer is offering discounts on a range of products.

Since Target’s warehouses were overstocked in 2022, it has had to take action to clear out some of its inventory. Having an inventory glut can hinder a retail chain’s profitability, so it’s a smart move for Target to offer a broad array of basic items at a discount.

Speaking of discounts, value-focused investors might wonder whether TGT stock is “deal-worthy.” The evidence says it is, especially if we apply some commonly cited valuation metrics.

An inventory glut may have inhibited Target’s profitability, but it appears that the company’s earnings have kept pace with its share price. Thus, Target’s GAAP-measured, trailing 12-month (TTM) price-to-earnings (P/E) ratio of 19.24 is slightly more favorable than the sector median P/E ratio of 20.6.

Furthermore, Target’s TTM price-to-sales (P/S) ratio is ultra-low at 0.65, versus the sector’s median P/S ratio of 1.2. Granted, those numbers are subject to change, especially since it looks like Target stock will get a bump today. Even with that though, Target shares should still be reasonably priced or “deal-worthy.”

Targeting growth and overcoming inflation

Even if Target reduced its prices on certain items in order to clear out its inventory, it still has to overcome inflation and budget-constrained shoppers. However, it turns out that Target’s latest round of quarterly financial data points to resilient consumers and an equally resilient company.

In the fourth quarter, Target grew its revenue 1.7% year over year to $31.9 billion, versus the expected $31.8 billion. That’s not a huge beat, but at least Target didn’t disappoint investors on that front.

Here’s where Target really hit the bull’s-eye though. Impressively, the retailer’s Q4 2023 operating income soared 60.9% year over year to $1.9 billion. In addition, Target’s fourth-quarter 2023 operating income margin of 5.8% represented a notable improvement over the 3.7% margin reported in the year-earlier quarter.

Fortunately, the retailer also reported that “shrink costs were lower than a year ago.” In the retail-sales business, “shrink” is a polite way of referring to shoplifting, so perhaps Target is successfully addressing the persistent problem of retail theft.

Target CEO Brian Cornell celebrated a generally successful quarter for his company, saying, “Our team’s efforts changed the momentum of our business, further improving our sales and traffic trends in the fourth quarter while driving profitability well ahead of expectations.”

Indeed, Target did manage to overcome inflation and deliver a Street-beating quarter of profits. Specifically, the retailer’s Q4 2023 adjusted net earnings increased 57.8% year over year to $1.38 billion. This equates to $2.98 per diluted share, which beat the analysts’ consensus estimate of $2.42 per share.

Stifel analyst Mark Astrachan summed up the sense of relief that today’s TGT stock traders are probably experiencing.

“We think F4Q results and guidance were better than feared,” Astrachan concluded.

The Stifel analyst also offered a positive takeaway that’s not just about Target but pertains to the U.S. retail sector as a whole. Specifically, Astrachan feels that “discretionary spending intentions are improving, including amongst lower-income households.”

It remains to be seen whether Americans’ “discretionary spending intentions” will continue to improve throughout 2024. If so, then TGT stock should maintain today’s upward momentum. At the very least, investors should appreciate the current discount in Target shares, although they might not be discounted for too much longer.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.