Consumer Staples King Poised to Surge 50% as Inflation Peaks

Inflation is usually pretty insidious, slowly eroding the purchasing power of your dollars. But occasionally, inflation intensifies to the point where it becomes an openly discussed problem.

This occurred following the COVID-19 pandemic, and the concern about rising costs persists to this day, with consumers adjusting their buying habits accordingly. That's bad news for Target's (NYSE: TGT) stock right now, but it may be opening up a buying opportunity for long-term investors.

What does Target do?

Target is one of the most well-known big-box retailers in the United States. Its stores sell everything from hardware items to food, and a wide range of products in between. It competes directly with Walmart (NYSE: WMT), though it is notable that Target doesn't have a club store format. However, there is a very big difference between Walmart and Target.

Image source: Getty Images.

Walmart's focus is on everyday low prices. You get basics, and you get them cheaply when you shop at Walmart. Target's focus is to offer a more upscale shopping experience, offering higher-cost products and a nicer shopping environment. Walmart's approach is resonating well with consumers worried about inflation. Target's approach is not.

To put some numbers on that, Walmart's third-quarter fiscal 2026 same-store sales in the United States rose 4.5%. That was driven by an increase in traffic and customers spending more per trip. Overall sales were up 5.1%. Simply put, Walmart is executing very well right now. Target, on the other hand, is struggling to attract customers, with same-store sales down 2.7% and overall sales off by 1.5% in its comparable third quarter.

Target has been through this before

The negative backdrop surrounding Target must be juxtaposed against another important fact. This retailer is a Dividend King, which means it has increased its dividend for at least 50 consecutive years. You can't create a streak like that by accident, especially as a retailer. There is something about the Target model that resonates with consumers.

Moreover, think about just this century. Target has survived the recession that accompanied the dot-com crash, the Great Recession period between 2007 and 2009, and is still recovering from the impact of the pandemic and subsequent recession. And yet, despite operating in a weakened state, the dividend payout ratio remains fairly robust at roughly 55%. Times are tough, but Target seems highly likely to muddle through the hard times just like it has for over five decades.

This is where the opportunity lies for investors who think in decades and not days. Target's stock price has declined by approximately 65% since 2021. That's a painful hit, to be sure. However, a part of that is clearly driven by investor sentiment, which is currently favoring lower-cost retailers, such as Walmart.

Eventually, inflation will fade from the conversation, and consumers will get used to higher prices. At that point, demand for a more upscale shopping experience is likely to increase. In the meantime, Target is already working to better align its offerings with changing consumer trends. The idea that Target's performance could improve and the stock could gain 50% isn't a huge stretch. Notably, a 50% gain would only bring the stock back to around $140, still far below the five-year high of $266.

Target just needs a little mood shift

The key here is that Target's stock is deeply out of favor. It would only require a few small positives at the business to get the stock back onto investors' radars. And if that happens, which seems likely eventually, the stock could easily see a 50% rally, if not more. Even then, there would be plenty of upside before the stock returned to its previous high-water mark. And, in the meantime, you can collect a fairly well-covered 4.5% dividend yield.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.