Hit the Bull’s Eye with Target Stocks

Like other retail chains, Target (NYSE:TGT) has had to overcome inflation and the general perception that the U.S. economy is not in perfect condition. As a result, while Magnificent Seven tech stocks are seeing a big surge in 2023, Target stock has clearly lagged.

Unlike Walmart (NYSE:WMT), Target has a special problem in that more than half of its annual sales come from discretionary items (toys, electronics, fashion items, etc.). As a result, Target is particularly vulnerable as shoppers cut back on non-essential purchases during periods of persistent inflation.

Perhaps this explains why the market dumped TGT stock yesterday, sending the stock down 3%. But if they feared an impending, disappointing earnings report, today’s stock traders may be in for a positive surprise from Target.

Are the target stocks “tradeable”?

Target is known for offering great deals on a variety of products. In this context, the company launched its Dealworthy campaign last February, offering around 400 deals on basic items. Some of these products cost less than $1, and most cost less than $10.

That said, Target is active in addressing consumer concerns about inflation. But that’s not the only reason big retailers offer discounts on a variety of products.

Target’s warehouses were overstocked for 2022, so they had to take steps to clear some inventory. Overstocking can hurt a retail chain’s profitability, so it’s a smart move for Target to offer a variety of basic items at discounted prices.

Speaking of discounts, value-oriented investors may be wondering if TGT stock is “worth the deal.” The evidence suggests this is especially true when commonly cited valuation metrics are applied.

Overstock may have hindered Target’s profitability, but the company’s performance appears to be keeping pace with its stock price. Therefore, 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.

Additionally, Target’s TTM price-to-sales (P/S) ratio of 0.65 is very low compared to the median P/S ratio for the sector of 1.2. Of course, these numbers are subject to change, especially since Target stock looks set to rise today. Regardless, Target stock should still be reasonably priced, or “trade value.”

Targeting growth and overcoming inflation

Even though Target is cutting prices on certain items to clear inventory, it still has to overcome inflation and shoppers on limited budgets. But Target’s latest quarterly financial data points to a resilient company as well as resilient consumers.

In the fourth quarter, Target’s sales increased 1.7% year-over-year to $31.9 billion, compared to expectations of $31.8 billion. It’s not a huge win, but at least Target didn’t disappoint investors on that front.

This is where Target really hits the mark. Surprisingly, the retailer’s fourth quarter 2023 operating profit increased 60.9% year over year to $1.9 billion. Additionally, Target’s operating margin for the fourth quarter of 2023 was 5.8%, a notable improvement compared to the 3.7% reported in the same period last year.

Fortunately, the distributor also said, “Shrinkage costs are lower than a year ago.” In the retail business, “shrink” is a polite way of referring to shoplifters, so Target may have successfully solved its chronic problem of retail theft.

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

In fact, Target overcame inflation and achieved a quarterly return. Specifically, the retailer’s adjusted net income for the fourth quarter of 2023 was $1.38 billion, up 57.8% year-over-year. This equates to $2.98 per diluted share, which beat analysts’ consensus estimate of $2.42 per share.

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

“We believe the F4Q results and guidance are better than feared,” Astrachan concluded.

Stifel analysts also offered some positive takeaways, not just for Target, but for the U.S. retail sector as a whole. In particular, Astrachan feels that “discretionary spending willingness is improving, including among low-income households.”

It remains to be seen whether Americans’ “discretionary spending intentions” will continue to improve throughout 2024. If so, TGT stock should maintain today’s upward momentum. At the very least, investors should appreciate the current discount on Target stock, although it may not remain discounted for too long.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.