Is Target Stock on Sale Now?

Target Corporation (NYSE: TGT) has a reputation as a big box retailer but there is a lot more under the surface to excite investors.

While shoppers think of Target as a place to buy goods, management views physical locations as multi-purpose spaces that also serve as distribution centers for online orders.

Target’s online strategy has helped it to avoid the need for separate warehouses and translated to more cost savings and higher profit margins.

Yet this is just the beginning, so let’s explore whether Target is now on sale?

Target Online Sales Growth Is Massive

No doubt the lockdowns a few years ago were a driver for Target’s online sales, which grew 145% year-over-year in 2020, and as more consumers became aware of the ordering approach, online sales grew to $19.7 billion in 2021 and $22.0 billion in 2022.

The strategy of keeping fulfillment costs low has been key to the company’s continuing success because online sales have slimmer margins. Remarkably, Target has sustained an impressive gross margin rate, which last quarter was reported at 28.2%, the highest in almost two years.

One of the primary reasons Target can maintain attractive margins is the depth and breadth of its private labels, which form an essential part of the business model, though they are often overlooked as a strategic advantage.

Brands like Good & Gather in groceries, Cat & Jack in children’s apparel, and Room Essentials in home goods, have become significant drivers of growth, differentiate Target from competitors, and offer higher margins. Target now has 45 so-called “owned-brands” under its corporate umbrella.

The margins on these private-label products are reportedly 25-30% higher compared to national brands, adding to Target’s competitive advantage and providing a cushion during economic downturns.

Small Stores Growing Faster

For most consumers, Target connotes big box store format with everything from groceries to clothing to baby food under one roof, but increasingly the company has been investing in small-format stores, particularly in urban markets and college towns.

These smaller stores are about one-third the size of a traditional Target store and offer a more curated selection tailored to local preferences, which is likely why they report 2-3% higher comparable sales growth rate versus traditional stores.

By catering to local consumers better, Target is squeezing out a higher ROI at smaller locations which bodes well for its future prospects. And with 180 of its total 1,958 stores featuring this smaller format, up from 100 a couple of years ago, it’s clear that Target sees huge potential and is investing heavily in this new strategy.

A rarely seen aspect of Target’s competitive advantage that allows it to grow store counts so quickly is its supply chain efficiency that relies on data analytics and even artificial intelligence to optimize inventory levels, reduce carrying costs, and increase in-stock availability.

A measure of how efficient Target has been is in its turnover ratio, which stands at 5.71 as of Q2 2023, above the industry average of 5.50. This key metric is one of the primary reasons that Target can maintain higher liquidity and increase cash flows, which in turn power future growth and shareholder returns.

With so much going for it, what do Target financials look like and is it time to buy TGT?

Is Target Stock Undervalued?

Target stock is 34.9% undervalued to its fair value of $148.44 per share according to the consensus rating of 31 analysts.

The spread between those analysts ranges from a low price target of $116 per share to a high of $184 per share.

A discounted cash flow forecast analysis places the intrinsic value of Target at $146 per share, right in line with analysts’ target, and represents 31.6% upside potential.

Even a price-to-earnings multiple analysis suggests Target is just under the key line in the sand that Buffett looks for of 15x. Currently trading with a PE of 14.9x, Target is increasingly enticing when viewed through a valuation lens.

Indeed this is further confirmed by looking at the price-to-sales ratio, which sits at just 0.5x, well below the sector average of 0.9x.

Target Financials Snapshot

Zooming out on Target and taking a look at its financial picture as a whole reveals a mix of pluses and minuses.

In the positive column is the company’s high return on invested capital of 12.7%, which suggests it does enjoy a decent-sized economic moat.

It’s also paying out a 4.05% dividend that has a 53 year growth streak, a highly impressive feat. 

Add to those pluses its brand advantage, supply chain efficiency, small-format store expansion, online sales growth, high gross margins, and owned-brand strategy and you’ve got a mix that is hard to ignore.

Indeed, the negatives are few and far between but they do exist, such as declining EPS and revenue growth. It can’t be ignored that in the most recent quarterly revenues did turn negative on a year-over-year basis for the first time in the five years we examined.

If sales have indeed plateaued, it’s easy to see why the share price has fallen so starkly in the past few months. The question is whether all the bad news has been factored in now, and with a dividend approaching the yield of short-term treasury bills maybe it has. At the very least, it seems that the reward-to-risk ratio is now favoring the bulls.

Is Target Stock a Buy Now?

If you’re the type of investor that likes to own a big-name brand that’s been heavily sold off in recent months, Target offers a prime opportunity.

It has a wealth of competitive advantages and a clear growth strategy, particularly with its highly successful small-stores format and online sales.

As the old saying goes when it’s time to buy you won’t feel like buying, and with TGT share price clearly showing signs of lower lows and lower highs, it’s hard to be courageous at this time, which is perhaps precisely the reason to summon it.

Short-term it’s very possible the trend continues lower but longer term the compelling valuation should act as a tailwind on the backs of bullish investors who buy the dip.

Even if it does move lower in the short-term, the dividend offers a layer of comfort for conservative investors willing to ride out the share price storm.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.