Shares of big box retailer Target (TGT) plummeted more than 20% after the company released its third-quarter earnings results that disappointed investors. While the past quarter was indeed ugly, as we’ll discuss below, I’m bullish on Target given its strong track record as a great dividend stock, its modest valuation, and the fact that sell-side analysts see upside of over 50% for shares over the next 12 months. I view the current post-earnings selloff as an attractive opportunity to acquire shares of a blue-chip company at a discount.
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Analyzing Target’s Q3 Results and Challenges
The retail giant cut its full-year earnings per share (EPS) guidance to $8.30 to $8.90 (down from $9 to $9.70 previously). Target missed earnings estimates by 20% and slightly fell short on revenue. Also, while same store sales inched higher by 0.3%, they fell well short of analyst expectations of 1.5%.
Target CEO Brian Cornell attributed some of the weakness to reduced consumer discretionary spending, which is understandable after several years of inflation and something many companies are facing.
Additionally, the company faced increased costs and increased inventory as it prepared for a prolonged port strike by rushing shipments in order to protect the customer experience. Although the port strike lasted only a few days and impacted quarterly results, I commend the company for prioritizing its customers and focusing on the long-term customer experience—something that aligns with the interests of long-term shareholders.
That said, while I have some sympathy for Target based on these mitigating factors, some of the disappointment is still on the company and it needs to work to sort some things out going forward. For example, its efforts to slash prices on thousands of items seems to have done little to drive traffic or increase sales.
Rising Competition Adds Pressure
Additionally, Target’s competitor Walmart (WMT) just reported Q3 results and not only beat earnings and revenue expectations, it did the opposite of Target by increasing its full-year guidance. Target’s competitors appear to be adapting better to the current environment, adding to the criticism Target faces. However, it’s important to note that Walmart’s business leans more heavily on groceries, which made up 60% of its U.S. revenue last fiscal year, compared to just 23% for Target. This emphasis on consumer staples may give Walmart an edge in a more cautious spending climate.
Analysts from Morgan Stanley have pointed out that mega-cap retailers (and Target competitors) like Amazon (AMZN), Costco (COST) and Walmart (WMT) are getting stronger, so intense competition will continue to be a pressing issue for Target going forward.
Target Is a Dividend King
Why do I say Target is a blue-chip stock? For one thing, Target is a phenomenal dividend stock. Target yields 3.7%, which is nearly triple the yield of the S&P 500 (SPX). But there’s more to it than that – Target has a laudable track record of consistently paying a dividend, and increasing the size of these payouts. Not only has the company paid a dividend for an incredible 56 years in a row, but it has also increased its payout in all 56 of these years, making it a Dividend King.
Given this strong track record and commitment to the dividend, Target will likely continue to grow its dividend over time, and investors buying today will enjoy larger payouts and an even better yield-on-cost in the years to come.
Target is also returning capital to shareholders via share repurchases. The Minneapolis-based company repurchased $354 million worth of shares during the quarter, and still has a massive $9.2 billion left on its share repurchase program, which can enable the company to significantly reduce its shares outstanding in the future. Share repurchases are another way to return capital to shareholders as they reduce the company’s share count and increase earnings per share.
Target’s Valuation Offers Opportunity
In addition, shares of Target are also fairly cheap after the selloff. At the midpoint of its updated EPS guidance of $8.60, the stock trades at just 14.2 times January 2025 earnings, well below the S&P 500’s average of over 25 times. Analysts expect earnings to grow to $9.78 in fiscal 2026, valuing the stock at just 12.5 times forward earnings, which is too cheap to ignore.
With a 20% post-earnings drawdown and a cheap multiple like this, it seems feasible that much of the bad news is already priced into Target stock. This could give investors some downside protection going forward and give the company a chance to exceed lower expectations. The low price-to-earnings multiple not only makes the stock more defensive but also creates potential for future upside when the company theoretically gets back on track.
While the timing is uncertain, acquiring shares of a reliable blue-chip stock like Target while it’s down and expectations are low can be a smart move. A positive catalyst can emerge unexpectedly, driving shares higher. One recent example in the consumer space that immediately springs to mind is Starbucks (SBUX). Sentiment towards the once-hot stock was poor, but shares surged roughly 25% in one day when the company announced it was hiring Chipotle (CMG) CEO Brian Niccol as its new CEO.
This isn’t to say that Target CEO Brian Cornell will be replaced or that an all-star CEO is waiting in the wings, but it illustrates that these types of beaten-down blue-chip names can be spring-loaded for upside once good news comes around again.
Is TGT Stock a Buy?
Turning to Wall Street, TGT earns a Moderate Buy consensus rating based on 17 Buys, 10 Holds, and zero Sell ratings assigned in the past three months. The average TGT stock price target of $182.52 implies 50.1% upside potential from current levels.
Looking Ahead
It was a rough day for Target and its shareholders. But the selloff creates the opportunity for new investors to buy shares of this blue-chip stock at a significant discount. The company certainly has its challenges to sort out, but there is still a lot to like about it. I’m bullish on Target based on its above-average yield, its long-term track record as an outstanding dividend growth stock, and its inexpensive valuation, which reflects the lowered expectations of the market.
While there may not be immediate catalysts to drive a sharp rebound, history shows that high-profile blue-chip stocks can rally significantly on even a bit of good news.
