Can Target stock rebound in a booming retail market? News ad

Goal today

$121.67 -33.21 (-21.44%)

(As of 1:09 p.m. ET)

52 week range

$120.94

▼

$181.86

Dividend yield

3.68%

P/E ratio

12.57

Target price

$174.80

Bye Target New York Stock Exchange: TGT has been a health leader in the retail sector in recent years, that is not the case today. The company’s weak results stem from the quality of its performance and lack of relevance in a budget-conscious environment. Results from other retailers, including Walmart New York Stock Exchange: WMT, TJX Companies New York Stock Exchange: TJXAnd Williams-Sonoma New York Stock Exchange: WSMshow them growth, maintaining strong or expanding margins, and provide a healthy outlook for these trends to continue. The view on consumer health excluding Target is that strong labor market trends point to a healthy spending season, with growth likely to exceed consensus estimates.

Target results aren’t too bad: shares move to rock bottom price

Target’s results were weak compared to analysts’ forecasts and industry averages, but not too bad for investors. The company continued its growth with revenue of $25.67 billion, up $1.15 billion from last year. The increase was achieved by 0.3%, driven by a 2.4% increase in traffic and a 10.8% increase in digital sales. In terms of general traffic, beauty, food and drink, and daily newspapers remain strong points.

The margin news is also mixed in with the squeeze, adding to the revenue weakness. Gross profit fell by 20 bps and operating margin by 60 bps due to higher inventory costs, supply chain costs and digitalization. The end result is adjusted earnings per share of $1.85, 2,000 basis points below the consensus estimate but still enough to support the company’s financial health and return on equity.

The outlook is equally poor, with sales expected to remain flat compared to last year and competitors forecast positive results. However, management also calls for earnings per share to be sufficient to support the capital return program if it reduces the prospects for the pace of buybacks. The full-year adjusted EPS target of $8.90 is $0.60 below the consensus estimate reported by MarketBeat.com but provides a sustainable dividend payout ratio of 52%.

Target’s balance sheet and cash flow can provide a return on capital

Return on equity in the third quarter included $516 million in dividends and another $354 million in buybacks. The dividend yields more than 3.5% annually, with the stock trading near long-term lows. Buybacks reduced share count by 0.2% for the quarter and are expected to continue, albeit at a slower pace, until earnings quality improves.

Cash flow and balance sheet performance is good. The company’s cash flow was negative for the quarter, but offset by year-to-date growth; Cash grows, inventories grow, current and total assets grow, but liabilities remain the same. Long-term debt leverage remains low at just 1x equity, and equity is growing, up 15% year-over-year.

Analyst sentiment influences stock price target

Initial analyst reaction wasn’t great, including two rating downgrades and a lower price target, but it could have been worse. The new ratings are Hold versus Buy, with targets of $108 and $130. The midpoint of this range coincides with recent lows in stock prices and could provide a lower bound for the market. Otherwise, this stock could set new lows and decline significantly from there. In this scenario, Target stock could enter a sustained downtrend from which it may never recover.

The likely scenario is that support will hold at the lower end of the trading range, consistent with the long-term moving average that has previously provided support. In this scenario, Target’s stock price could fall to current levels until more news comes out. With economic headwinds expected to ease in 2025 and tailwinds to strengthen, Target’s business and stock price could begin to improve by the middle of next year.

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