Target Stock: Time to Panic?

There's no question about it. Target (NYSE: TGT) has been one of the most disappointing retail stocks on the market recently. Over the last three years, the stock price fell 39%, while the S&P 500 has gained 50%.

After another earnings report came in well below both analysts' and the company's expectations, Target seems as far away from a recovery as ever. Comparable sales in the quarter fell 3.8%, which included declines in both traffic and average transaction value. Revenue fell 2.8% in the quarter to $23.85 billion, which missed estimates at $24.35 billion. Gross margin declined from 28.8% to 28.2%. On the bottom line, adjusted earnings per share fell from $2.03 in the quarter a year ago to $1.30. That was well below the consensus at $1.65.

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Image source: Target.

There was no single reason for Target's weak performance. Rather, it was a familiar chorus of headwinds that plagued the stock. Sales in discretionary categories continued with declines in every retail segment except for food and beverage. Home furnishings and decor were particularly weak, falling 8% to $3.2 billion, which may be a reflection of weakness in the housing sector.

Target management noted weakening consumer sentiment and negative effects from a boycott in response to its decision to end its DEI initiatives. That boycott has now ended, but it seems to show evidence that Target is losing touch with its customer base. It's struggling to compete with rivals like Walmart, keep its merchandise fresh, and manage its inventory appropriately.

Looking ahead, the company cut its full-year adjusted earnings per share (EPS) guidance from $8.80 to $9.80 to $7.00 to $9.00. It also lowered its full-year sales guidance, calling for a low-single-digit decline in sales.

Can Target turn it around?

Given the underwhelming first-quarter performance and the cut in guidance, Target isn't giving investors much of a reason for hope.

In addition to the challenges the company faces, both with its own issues and a sluggish macro environment, it now has to deal with pressure from tariffs. The company said that it's taking steps to deal with tariffs, including rearranging its supply chain, leveraging its economies of scale, and using other tactics so that it only moves to price increases as a last resort.

Target also announced the establishment of an enterprise formation office, headed by Michael Fiddelke, to formulate a better turnaround strategy and "bring more clarity and speed to how we operate."

What seems clear from this and recent Target earnings calls is that the company doesn't have a clear understanding of why sales continue to slide or what would fix it. Until that's better understood, a turnaround will be difficult to achieve.

Problems abound, but panic is premature

There's no doubt that Target is in a tough position today, but the good news for investors is that its challenges seem largely priced into the stock.

Target's stock price fell 5.2% on Wednesday after it missed estimates and cut its guidance, but the sell-off could have been worse. Based on the midpoint of its updated guidance, Target trades at a forward price-to-earnings of less than 12, and its dividend yield is now 4.8%. Target is also a Dividend King, having raised its quarterly payout every year for more than 50 years. At this point, the dividend of $4.48 per share is still well-funded, even at the low end of its guidance, and Target said it expected a slight increase in the dividend this year. There's no reason to worry about a dividend cut.

While the current performance is clearly wanting, the company still has several strengths, including its omnichannel fulfillment capabilities, unique assortment, and brand. It's making progress in areas like cutting down on theft and growing its digital advertising business.

Target should eventually return to growth, though the stock is likely to be dead money until the company can deliver some positive numbers. At this point, that's unlikely to come until at least next year.

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Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.