Investors often caution against catching a falling knife, and Target Corporation (NYSE:TGT) has seen a prolonged decline in the past two years. While challenges like theft, lower consumer demand, and rising interest rates weigh on the general merchandise retail giant, Target remains a robust company committed to creating shareholder value. Combined with the fact that shares are trading at a discounted price, Target could present an opportunity for prospective investors. Accordingly, I am bullish on TGT stock.
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Why is Target Stock Down?
Target stock is currently down around 29% over the past year and down about 58% from its 2021 highs. In my view, this decline can be attributed to three key factors: growing theft, weaker consumer demand, and higher interest rates. Let’s take a look at each of these factors.
Escalating Theft
One significant contributor to Target’s recent stock downturn revolves around the alarming escalation of theft, prompting the company to take decisive action. Target recently declared the closure of nine stores spread across major cities in four states, citing theft and organized retail crime as the primary culprits, creating an environment deemed unsafe for both staff and customers.
In its news release, Target articulated the severity of the situation, stating, “We cannot continue operating these stores because theft and organized retail crime are threatening the safety of our team and guests and contributing to unsustainable business performance…We know that our stores serve an important role in their communities, but we can only be successful if the working and shopping environment is safe for all.”
This move by Target reflects a broader trend of shoplifting woes that have been growing exponentially in the United States. Shockingly, last year alone, the U.S. retail industry suffered an estimated loss of $112.1 billion due to crime and theft. Target’s recent decision to shutter stores serves as a poignant indicator of a worsening trend, understandably causing unease among investors regarding the security of their investment.
Weaker Consumer Demand
A key factor amplifying the current downtrend in the stock can be attributed to a softening in consumer demand. In Target’s latest earnings call, management underscored the challenging decisions consumers are grappling with in every purchase. Whether it’s navigating budget constraints amid rising prices or strategizing for the resumption of student loan payments, Target’s clientele faces several challenges.
This issue was notably reflected in the company’s recent Q2 results, where comparable sales witnessed a 5.4% decline, with notable weakness in discretionary categories. Consequently, Target’s Q2 revenues experienced a 4.9% contraction, settling at $24.8 billion. In response, management found it necessary to revise its earlier guidance. The company now expects to achieve EPS in the range of $7.00 to $8.00 in Fiscal 2023, a downward adjustment from the previously projected $7.75 to $8.75.
Rising Interest Rates
Rising interest rates are negatively impacting Target stock in two ways. First, as Target is typically favored by income-oriented investors, its allure diminishes in the face of rising rates. In such a scenario, Target’s cost of equity goes up, prompting investors to consider securities with comparable or superior yields and a lower risk profile, such as government bonds.
The second, more immediate consequence of rising interest rates on Target stock is the heightened interest expenses incurred on Target’s existing debt. As of the end of July, Target carried a substantial total debt of $19.3 billion on its balance sheet. The surge in interest rates has substantially increased Target’s interest payments, with the company spending $542 million on interest over the past 12 months versus $433 million in the previous year.
Strong Focus on Shareholder Returns
While these short-term challenges are taking a toll on its financials, Target remains a high-quality company with a strong focus on shareholder returns. Specifically, the company features one of the most impressive dividend growth track records in the market. Its commitment to share repurchases is also noteworthy. Therefore, investors could take advantage of the ongoing price decline to purchase Target stock with a heftier blended (dividend + buyback) yield.
Regarding its dividend, Target has achieved an impressive milestone, increasing it for 55 consecutive years — a feat achieved by only a select few companies. Despite this mature track record, the rate of dividend growth has remained very strong.
Over the past five and 10 years, Target’s dividend has grown by a compound annual growth rate (CAGR) of 11.7% and 11.6%, respectively. Simultaneously, the stock’s yield has risen to an enticing 4.1%. The combination of an above-average dividend and consistent hikes undoubtedly enhances the stock’s attractiveness.
Turning to share repurchases, Target has effectively halved its share count over the past two decades. Recently, repurchases have tapered off, with Target buying back only $127 million worth of stock in the last four quarters. However, the significant stock price decline and Target trading at a modest 14.6x forward earnings multiple based on management’s guidance suggest the potential for an uptick in buybacks in the near future.
Is TGT Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Target has a Moderate Buy consensus rating based on 13 Buys and 16 Holds assigned in the past three months. At $146.21, the average Target stock forecast implies 39.2% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell TGT stock, the most accurate analyst covering the stock (on a one-year timeframe) is Peter Benedict from Robert W. Baird, with an average return of 20.34% per rating and a 59% success rate.
The Takeaway
Overall, while Target faces challenges on multiple fronts, it remains a resilient and quality company with a steadfast commitment to shareholder returns. Target’s focus on dividend growth and share repurchases, coupled with 55 years of consecutive dividend increases, should reassure investors of the company’s commitment to rewarding them. Thus, the recent stock decline could present a potential buying opportunity.
