The holiday shopping season is upon us, and one of the big retail beneficiaries is likely to be Target Corporation, the ubiquitous department store chain. Should you purchase a few shares of Target stock before you stop by your local store for toys and gifts? Here’s what you need to know.
Third Quarter 2023 Earnings
Target released its third quarter 2023 earnings on Nov. 15, 2023. The company reported earnings-per-share, or EPS, of $2.10, above expectations and up 36% year over year. Total revenue was $25.4 billion, which was down 4.2% from the same period last year. But operating income was up by 28.9% over last year at $1.3 billion.
Comparable sales were down 4.9% over the prior quarter, which was in line with expectations. To break it down, same store sales were down 4.6%, while digital comparable sales were down 6%.
Executives cited the current challenges of slowing discretionary spending. One is that inflation, while moderating, is still high, and stores are increasing retail shrink, or to put it simply, theft, as reasons for the decline in revenue over the same period last year.
So, what does all this mean? The fact that top-line revenue was down but bottom-line income and earnings per share were up means that the company is becoming more efficient, which bodes well for future performance, particularly as inflation continues to decline and consumer discretionary spending rises. Target is recognizing what the challenges are in the current economy and is taking steps to set itself up for success for when there is an economic rebound.
What the Market Says
Target shares closed at $129.89 on Nov. 17, 2023, after rising over 17% the day that third-quarter earnings were announced. By contrast, competitor and retail giant Walmart (WMT) saw its stock drop 8% after its earnings announcement, even though the company reported higher revenue than the same period a year ago. Walmart’s EPS beat was just $0.01, and its guidance for future performance was softer than expected.
Despite the bump in the price of the stock on the heels of the earnings announcement, Target stock is still down about 15% year to date.
Buy, Hold or Sell?
Of the 26 analysts who have made recommendations for Target for November, about 18 analysts recommend holding the stock. Two rate the stock a strong buy, and two more rate it a buy. Three analysts rated it an “underperform” and one recommends holding it.
In all, the average recommendation is 2.4 out of 5, or just about mid-way between “buy” and “hold.” The average analyst’s 12-month price target is $148.67, with a low estimate of $110.79 and a high of $181.00. While this can hardly be considered a ringing endorsement by analysts, the stock is considered to be undervalued.
Target By the Numbers
Target pays a dividend, and its forward dividend is $4.40, or 3.39%. Its P/E ratio is 16.55, meaning that investors are paying $16.55 for each dollar of earnings.
Walmart’s P/E ratio is 25.85, making it a more expensive option. Other competitors in the retail space include Macy’s (in apparel), with a P/E ratio of 5.89, Kroger (in grocery), with a P/E ratio of 18.95, and Dollar General (in general merchandise), with a P/E ratio of 12.41. Amazon can also be considered a competitor, particularly on the digital side. Amazon’s P/E ratio is 75.61, although the many other segments in which Amazon competes make that a somewhat poor comparison.
Target’s market capitalization, which is the number of outstanding shares times the share price, or the value of the company, is $59.964 billion.
Target operates nearly 2,000 stores across the U.S. and has over 50 distribution centers nationwide. The company has about 440,000 employees and plans to add about 100,000 seasonal workers for the busy holiday season.
How Target Is Positioned for the Future
Target’s broad selection of merchandise draws consumers who love the idea of getting everything they need in one place. Target stores carry toys, clothing, groceries, furniture, housewares, health and beauty aids, and more, stocking both national brand names and private-label Target brand products.
The challenges Target is currently facing, according to executives, show signs of abating in the coming months. As inflation continues to moderate and wages either maintain or continue to rise, consumer discretionary spending should increase.
Target is addressing the challenge of shrink by locking up some items that tend to walk out the door without stopping at the cash register first. This is a decision the company insists that most consumers welcome, although some comments on social media would indicate otherwise. But declining inflation may moderate shrink as well, because as products become more affordable there is less desperation that may cause increased theft.
Is Target a Buy Ahead of the Holidays?
It certainly appears as though Target has some advantages going into this holiday season. The company has improved its profitability, as evidenced by its ability to produce a bottom-line increase in EPS even as top-line revenue had declined. It appears to be in a more solid position than some competitors, such as Walmart. And it is setting itself up to be ready as inflation continues to moderate, and consumer discretionary spending improves. If your portfolio is in need of a retail position, Target Corp. is certainly worth a serious look.
Information is accurate as of Nov. 27, 2023.
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