Target Shares Surge as Same-Store Sales Turn Positive. Is It Too Late to Buy the Stock?

With its second-quarter results hitting the mark, shares of Target (TGT 1.07%) soared as investors cheered its quarterly earnings report and guidance. The stock price rose 11% during the session following its results, helping it rally after its shares have languished for most of the summer.

Let’s take a look at what got investors excited and whether it’s too late to buy the stock after this recent rally.

Same-store sales and gross margins in focus

Target turned in solid Q2 results, with revenue rising nearly 3% year over year to $25.5 billion and its adjusted earnings per share (EPS) soaring 42% to $2.57. That topped the analyst consensus, which was looking for revenue of $25.2 billion and adjusted EPS of $2.18.

Same-store sales rose 2%, marking the retailer’s first quarter of positive comparable-store sales in five quarters. The gains were driven by a 3% increase in traffic, although the average ticket declined. E-commerce sales, meanwhile, climbed 8.7%.

Beauty was a standout category for Target, with the segment seeing 9% same-store sales growth. Apparel comparable-store sales were also solid, up 3%, led by low double-digit growth from its All In Motion brand. Food & beverage and essentials both saw low single-digit comp growth.

Target also continued to grow its loyalty members, adding 2 million in the quarter. It now has over 100 million loyalty members. It relaunched the program in this year’s Q1 and redesigned it to provide more options for how customers put it to use.

Another important metric that impressed was gross margins, which increased 190 basis points from 27% to 28.9%. Target has long been dealing with a shrinking issue stemming from organized theft hitting its stores. Shrink is the amount of merchandise that gets lost, damaged, spoiled, stolen, or just generally can’t be sold. Lower shrink accounted for 90 basis points of the gross-margin improvement.

Last year, Target said it saw $500 million more in shrink than in 2022 which management says was largely due to theft. The company has been working to solve the issue, and those efforts clearly showed up in its improved gross margins. A combination of expanding its use of locked cases as well as working with law enforcement has helped lead to the improvement.

Image source: Getty Images.

Looking ahead, Target reiterated its forecast for a full-year, same-store sales increase of between 0% to 2%. However, it increased its full-year adjusted EPS forecast to a range of $9 to $9.70, up from the prior outlook of $8.60 to $9.60.

For Q3, it guided for same-store sales to rise between 0% to 2% as well. It is projecting adjusted EPS to be between $2.10 to $2.40.

With its guidance, management said it was taking a prudent outlook given an uncertain macroeconomic backdrop but was playing to win.

Is it too late to buy the stock?

Despite the gains, Target stock still trades at a large discount to its rival Walmart (WMT 0.16%). It has a forward price-to-earnings (P/E) ratio of 15 times next year’s analyst estimates versus nearly 28 times for its larger rival.

TGT PE Ratio (Forward 1y) data by YCharts.

I think that Walmart deserves a premium given its stronger growth, larger scale, and more defensive nature. However, I don’t think the gap should be as wide as it currently is.

With Target starting to fix its shrink issue and same-store sales turning positive, things are looking up for the retailer. Now the company is more economically sensitive than Walmart, as the latter benefits more from the trade-down effect and having more sales tied to grocery items. However, if the economy holds up, Target looks well-positioned to continue its current turnaround.

With Target just starting to improve the shrink and same-store sales issues that have been plaguing it, together with its attractive valuation, it doesn’t look too late to buy the stock. As such, long-term investors should feel comfortable adding the stock to their portfolios at current levels, even after the post-earnings rally.