What happened
Week to date, shares of Target (TGT -1.48%) were trading up 12% as of 1:00 p.m. ET on Friday, according to data provided by S&P Global Market Intelligence. Earlier this week, Target delivered better-than-expected earnings and offered a positive outlook for the near term.
Investors had been concerned about supply chains and margins going into the quarter, but Target's strategy to open and upgrade stores continues to impress investors.
So what
Target's string of successful quarters over the last few years has demonstrated that it's a well-run business that might deserve a higher valuation. It bucked the retail-industry trend by opening stores when everyone else was closing them going into the pandemic. Over the last five years, this strategy led to revenue increasing cumulatively by 50%, while earnings per share more than doubled.
The stock entered the quarter trading at less than 14 times forward earnings estimates, but that appears too low for an established retail chain that's seeing momentum in digital sales and expects long-term growth pacing in the high-single-digit range in adjusted earnings per share.
Image source: Target.
Now what
Digital sales make up 19% of the business, but this should continue to be a contributor to total revenue growth. "We have scale in same-day services and the pathway for more digital growth, thanks to the synchronized operation of stores, fulfillment centers, flow centers, sortation centers and Shipt," CEO Brian Cornell said on the Q4 earnings call.
Most importantly, Target's latest earnings results show the business is delivering value to consumers in an inflationary environment, which speaks to the company's competitive position in the retail industry.
The stock's relatively low valuation could leave room for further upside in the near term. This Dividend King is still 16% off its recent high and has a dividend yield of 1.5%.
