Is Target (TGT -0.71%) stock done? One might think so, given the massive sell-off following its third-quarter 2022 earnings report.
Without a doubt, inflation and slowing consumer spending is likely to slow the company's growth in the near term. The question for investors is whether that is a reason to abandon this retail stock?
What happened to Target's earnings
Admittedly, the Q3 2022 earnings report is one the company and its shareholders will want to forget. During the quarter, sales rose 3% to $26.5 billion. But that modest increase was not enough to offset a surge in the cost of sales and selling, and general and administrative expenses. With those expenses, net earnings dropped 52% during the period to $712 million.
Target Chairman and CEO Brian Cornell cited rising inflation, higher interest rates, and economic uncertainty as the reasons for the slowing growth. Cornell also pointed to a "significant increase in theft and organized retail crime." He later said this caused a $400 million reduction in the gross margin compared to last year, a factor that could lead to store closures in the affected areas.
The company's outlook pointed to a "low-single-digit" decline for Q4, a factor that sent shares plummeting by 13% in the following trading session. Over the last 12 months, the stock has fallen around 40%.
Putting earnings into perspective
But despite the lackluster financial performance, investors should remember that Target remains a stock market performer backed up by a solid business. Despite the falling stock price, Target stock has outperformed the S&P 500 over the last five years.
Also, the company's after-tax return on invested capital (ROIC) came in at 15% during the quarter. While that fell short of the 31% ROIC in the year-ago quarter, it still constitutes a solid return.
The company also gave investors a vote of confidence in June when it raised the dividend by 20% to $4.32 per share annually. This takes the cash return to around 2.5%, well above the S&P 500 average of just under 1.7%.
That rate of increase is notable because Target has increased that payout for 51 straight years. This makes it a Dividend King, and losing that status could undermine confidence in the stock. By offering the huge payout hike, it effectively told investors that it could afford that hike and annual increases in the future. That assurance should reinforce confidence in Target.
Additionally, with the drop in the stock price, Target now has a price-to-earnings (P/E) ratio of 18. This is less than the earnings multiples for rivals Walmart and Costco, which sell for 30 and 40 times earnings, respectively. That difference in the P/E ratio could give investors another reason to buy.
Should I consider Target stock?
In the end, the post-earnings decline and the underlying strength of the business make Target stock a buy. While the earnings results fell short of expectations, the company's problems appear to be temporary or at least ones that it can fix.
Moreover, Target has become the cheapest of the major nationwide discount retailers. And if it can drive consistent growth (or at least avoid significant declines), management pivots or an improving economy can bring it back to growth.
Furthermore, the massive dividend increase and high growing dividend not only serve as a confidence builder but can also provide a rising source of income for dividend investors. For investors looking for income and long-term growth, Target stock appears positioned to bolster portfolios.
