Shares of Target Corporation TGT have fallen 15.8% in the past three months, prompting investors to evaluate whether this dip signals a buying opportunity or a deeper concern. As a well-established player in the retail sector, Target is known for its strong market presence and customer-centric approach. However, the broader market dynamics and specific challenges faced by the company might have contributed to the recent decline.
Target has underperformed the Retail–Discount Stores industry and the S&P 500 Index, which recorded respective gains of 2.3% and 4% during the same period. The stock also lagged the Retail-Wholesale sector, which grew 6.6%.
TGT Past 3-Month Performance
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Closing at $131.48 last Friday, Target is sitting 27.7% below its 52-week high of $181.86, reached on April 1. Moreover, TGT is trading below its 50-day moving average, suggesting a bearish trend.
TGT Trades Below 50-Day Moving Average
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What’s Hurting TGT Stock?
Target currently faces multiple headwinds that make it a less compelling investment opportunity in the near term. The company’s third-quarter fiscal 2024 performance highlighted persistent challenges, including declining discretionary spending, compressed margins and rising operational costs. Discretionary categories such as apparel and home have shown significant weakness as consumers prioritize essentials.
Apparel saw a slight decline, while home goods experienced a mid-single-digit decrease in comparable sales during the third quarter. Comparable sales in these categories decelerated by approximately 4 percentage points compared to the second quarter. The ongoing trend of "resourceful" shopping by consumers, who now wait for steep discounts on non-essentials, has pressured these segments. The average ticket size declined by 2% as consumers remained cautious in managing their household budgets.
Profitability was a key concern in the quarter, as Target encountered multiple cost headwinds, including healthcare and general liability expenses, which contributed to the increase in selling, general and administrative (SG&A) costs during the quarter. The company also incurred higher costs due to rerouting shipments in response to East Coast and Gulf port strikes and timing issues with Asian imports.
The SG&A expense rate increased by 50 basis points year over year in the third quarter. As a result, Target's operating margin contracted 60 basis points, reflecting the combined effects of softer sales in high-margin categories and increased supply chain and fulfillment expenses.
Target adopted a cautious stance for the fourth quarter, forecasting flat comparable sales as discretionary demand shows no signs of recovery. The company also cited structural challenges, including a shortened holiday shopping season. It guided adjusted earnings in the range of $1.85-$2.45 per share, which suggests a decline from $2.98 reported in the year-ago period.
How Consensus Estimates Stack Up for Target
Reflecting a more cautious outlook for Target, the Zacks Consensus Estimate for earnings per share has experienced downward revisions. Over the past 30 days, the consensus estimate for the current and next fiscal has dipped by 5.3% and 6.8% to $8.60 and $9.25 per share, respectively.
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Target Building Blocks for the Future
Target's stock has faced headwinds over the past three months, but the company is making strategic moves that could yield results in the long run. Target is leveraging its strong brand presence, diverse product portfolio and expanding e-commerce capabilities, alongside a growing store footprint, to solidify its market position and drive sustainable growth. By prioritizing innovation and integrating AI technology, the company is laying a solid foundation for long-term success.
Seamlessly blending physical stores with a robust digital platform, Target has enhanced the customer shopping experience. Its focus on same-day delivery, curbside pickup and personalized online services has bolstered its competitive edge against industry leaders such as Amazon AMZN, Walmart WMT and Dollar General DG. Comparable digital sales surged by 10.8% in the third quarter of fiscal 2024. Drive-Up alone contributed more than $2 billion in sales.
Target's multi-category assortment of owned and popular national brands firm its status as a single-stop shopping destination. TGT’s beauty category continues to shine, achieving a comparable sales increase of more than 6% in the third quarter. This performance is driven by partnerships like Ulta Beauty at Target and exclusive product launches. Private-label products, such as Good & Gather and Hearth & Hand with Magnolia, continue to drive consumer interest.
In the current economic climate, Target's pricing strategy has proven effective in appealing to budget-conscious shoppers. Price reductions across thousands of items are aimed to stimulate sales. The Target Circle loyalty program is also playing a crucial role in enhancing customer retention and engagement, with nearly 3 million new members enrolled in the third quarter alone.
Target's disciplined capital expenditure plan underscores its focus on operational excellence and future growth. The company plans to invest nearly $3 billion in fiscal 2024, increasing to $4-$5 billion in fiscal 2025. With a trailing 12-month after-tax ROIC of 15.9% and continued investment in high-performing categories like beauty and essentials, Target is building the blocks for the future.
Unlocking Target’s Valuation
Although Target stock is currently trading at a discount compared to its industry peers, this valuation disparity might not be as favorable as it seems. The lower price could be indicative of underlying issues rather than representing a clear investment opportunity.
Target is currently trading at a discount to its historical and industry benchmarks. The stock has a forward 12-month P/E ratio of 14.32, which is below the median level of 15.27 scaled in the past year. This compares to the forward 12-month P/E ratio of 30.82 for the industry.
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How to Play TGT Stock?
Target’s strategic investments position the company for long-term growth, but near-term challenges make it less appealing to investors seeking stability in the retail sector. Persistent weakness in discretionary spending and margin compression point to potential difficulties in regaining momentum. Furthermore, a cautious earnings outlook indicates that a recovery may take longer than anticipated. TGT currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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