Is it finally time to buy target stocks?

Aimhis (TGT 1.07%) the stock rose 11% on Aug. 21 after the retailer released its second-quarter earnings report. Its revenue rose 3 percent year over year to $25.45 billion, beating analysts’ estimates by $240 million, as its comparable sales rose 2 percent. Its adjusted earnings climbed 42% to $2.57 a share and also beat the consensus forecast by $0.39.

Target’s headline numbers were impressive, but its stock remains more than 40% below its November 2021 all-time high. Let’s see if this retail stock is finally ready for a comeback after its recent gains took a beating.

Image source: Getty Images.

Why has Target’s stock fallen over the past three years?

Target was one of the few large retailers to survive the “retail apocalypse.” He kept up with Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) matching their prices, launching private labels and expanding their own e-commerce capabilities. It also successfully turned its own brick-and-mortar stores into a fulfillment network for online deliveries and in-store pickups, as more than 75% of the US population already lived within 10 miles of its stores.

In fiscal 2020 (which ended in January 2021), Target’s revenue rose 20% as its comparable sales rose 19%. This acceleration was driven by its digital comparable sales, which grew 145% as more people shopped online during the COVID-19 pandemic. It maintained this momentum in fiscal 2021, but its growth stalled in fiscal 2022 and 2023.

Data source: target.

In fiscal 2022, Target faced persistent supply chain disruptions, inflationary headwinds for consumer spending and tough comparisons to its pandemic-fueled growth. It cut a lot of its merchandise as its growth cooled and inventory levels rose. But those steep discounts, along with higher shipping costs, have crushed its gross margins.

That situation did not improve in fiscal 2023. Its growth was still held back by inflation and competitive headwinds, and its slowdown was exacerbated by theft and security concerns and a conservative-led boycott in response to the Pride Month collection . Its gross margin increased as shipping costs stabilized and it reduced inventory, but remained below its levels in fiscal 2020 and fiscal 2021. That’s why Target underperformed Walmart by such a wide margin in the last three years.

Is Target’s business finally recovering?

In the first quarter of fiscal 2024, Target’s compensation fell 3.7%, but its gross margin rose 140 basis points to 27.7% as cost improvements offset cuts. These mixed results suggested the company was not out of the woods yet.

But in Q2, Target’s comps ultimately rose 2% as its gross margin expanded 190 basis points to 28.9% and surpassed pandemic-era highs. Its shares are expected to grow by about 0% to 2% in both the third quarter and the full year.

This outlook isn’t a clear signal, but it does imply that Target has passed its cyclical threshold in fiscal 2023 and likely won’t become a late-stage victim of the retail apocalypse like Bed Bath & Beyond. It attributes its slow but steady recovery to double-digit growth in same-day delivery services, higher discretionary spending (particularly in apparel and beauty), improvements to the in-store shopping experience and strategic price cuts for thousands of everyday items. . It has also made progress in combating shoplifting by closing problem stores, locking up items and hiring more security guards.

Target continues to expand its brick-and-mortar footprint even as it trims its leaner stores. It ended Q2 with 1,966 stores, compared to 1,955 stores a year ago and 1,897 stores at the end of fiscal 2020. It’s generally a good sign when a retailer can continue to open new stores as it grows comparable sales and gross margins.

Bottom line, Target expects adjusted earnings per share (EPS) to rise 0% to 14% year-over-year in Q3 and 1% to 8.5% for the full year. That’s higher than previous full-year forecasts for a 4% decline to 7% growth. Analysts anticipate an increase of 4%.

Is it a good time to buy Target stock?

At $160, Target trades at just 17 times the midpoint of adjusted EPS guidance for fiscal 2024. It also pays a decent forward dividend yield of about 3% and is a Dividend King that has increased the annual payment for 53 consecutive years.

Therefore, Target looks like a safe stock to buy again at these levels. It probably won’t revisit its all-time highs anytime soon, but its stabilizing growth, low valuation and reliable dividend should limit its downside potential in this volatile market.