Image source: Target Corporation.

Retailing is a tough business that's characterized by intense competition and low profit margins. However, chains that achieve national scale, strong brand recognition, and a loyal following can produce a decades-long string of improving returns for investors.

Just look at Wal-Mart (NYSE:WMT) and its incredible rise into a global selling titan, or Costco (NASDAQ:COST) and its recent achievement of $100 billion in sales from a tiny start in 1983.

Discount specialist Target (NYSE:TGT) hasn't enoyed anything like these strong performances. Yes, it's a testament to its operating strength that the retailer is still doing business almost 40 years from its initial public offering. However, its revenue base has only risen at a 6% compound annual growth rate over the past 25 years. Target's stock has underperformed the market in the last decade, rising 55% compared to the S&P 500's 71% gain.

Target's recent stock history

Target Corporation opened its first discount store in 1962 and has paid dividends every quarter since its 1967 IPO. Its long streak of consecutive dividend boosts makes it one of just a handful of retailers that can claim the title of Dividend Aristocrat.

Yet investors haven't seen much to celebrate in Target's recent share price history. A failed expansion into the Canadian market produced major losses in 2014 and 2015 as a data breach sent customer traffic down, forcing the retailer to slash prices to clear inventory.

At the same time, competition is rising from smaller discount chains; places like Dollar Tree (NASDAQ:DLTR) whose store base has surged from 4,300 to 6,000 since 2012. The value-based retailer has seen its comparable-store sales rise by at least 2% in each of the last two years as Target's have declined by 2%.

As a result of these pressures, Target's stock failed to keep pace with the broader market and with comparable retail rivals.

TGT Chart

TGT data by YCharts.

Target's most recent results show a company that's still struggling to attract shoppers in an ultra-competitive market. Customer traffic was flat last quarter, compared to a 4% jump for Costco and a 1.5% boost for Wal-Mart. Target hasn't found great traction in its online business, either. E-commerce contributed 0.6 percentage points of the company's 1.2% comparable-store sales in Q1, down from 0.8 percentage points the prior year.

Can Target's stock recover?

Target has significant competitive strengths that it can lean on to engineer a recovery from its funk. Its signature categories, for example, which include apparel, baby, wellness, and kids products, are growing faster than its overall business and carry significantly higher profit margins. These exclusive offerings are a big reason why the retailer posts unusually high profitability: Gross profit margin is 30% of sales, compared to 25% for Wal-Mart and just 13% for Costco. They also make the stores stand out in a sea of competition.

Target's shopping app. Image source: Target.

In addition, Target's commitment to the online sales channel could start producing consistent growth soon. After all, management did extremely well during holiday season by using a simple but effective digital sales promotion. The slowdown that followed in the next quarter was disappointing, but Target still managed to boost online selling by 23% in Q1 -- on top of the prior year's 38% spike.

Finally, as rival Wal-Mart has demonstrated, customers respond positively when retailers make improvements to the shopping experience. Target has plenty of room for gains here through initiatives like better merchandise stocking and a revamped grocery section.

Target can't just hit one of these priorities and expect to win back significant market share, though. The retailer needs to press its merchandising strengths, establish itself as an online sales leader, and improve the in-store shopping experience in order to get back to consistent growth and produce strong investor returns from here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.