From time to time, stock-market swoons are inevitable. But investors needn't fear them, because typically, when the market drops broadly, it also pulls down the prices of companies with solid long-term prospects. With the S&P 500 down by about 17% since the start of 2022, that's the case right now.
Target (TGT -0.70%) has dropped roughly 30% this year, nearly double the overall market. That includes a 13% decline on Nov. 16 after the company released quarterly results. Therefore, although the nervous investing climate has contributed to its pain, there are other factors investors interested in Target's stock must consider.
With Target's stock price down sharply, that makes this an opportune time to decide whether to buy shares.
Image source: Getty Images.
Short-term hiccup for Target
Target dismayed investors in June when management warned it would have to mark down merchandise to clear the shelves, hurting its near-term margin and profit. Management announced that it expected the company's operating margin in the fiscal second quarter (which ended July 30) to come in around 2%, much lower than the 5.3% figure it had guided for the previous month.
For that quarter, Target's operating margin was 1.2%, down by 8.6 percentage points from the previous year. Inventory was $15.3 billion, higher than the $11.3 billion in the year-ago period.
In the fiscal third quarter, which ended on Oct. 29, the company's operating margin was 3.9%, compared to 7.9% in the previous year. This was due to continued markdowns, higher freight and merchandise costs, and inventory shrinkage. Previously expecting a 6% margin in the second half of the year, management is now calling for a "wide range for its fourth quarter operating margin rate centered around 3 percent."
Certainly, no shareholder wants to hear that a retailer has to discount goods. But there were other factors at work, such as supply chain disruptions, which hurt Target's ability to get the proper inventory mix into stores. Management has been working on fixing the inventory issue by reducing exposure to discretionary spending categories. Although this has gone on longer than I would like, it appears to be a short-term hiccup rather than evidence of larger problems.
Attracting customers
Target still attracts customers, an indication that they still find shopping in stores and online desirable. Same-store sales (comps) continue to increase. For the third quarter, overall comps grew by 2.7%. Meanwhile, traffic increased by 1.4% and spending rose by 1.3%.
Breaking things down a bit further, store comps increased by 3.2% and digital comps were up by 0.3%. Management also announced that it continues to gain market share in key merchandising categories.
Right now, higher inflation has hurt consumers' purchasing power, and the Federal Reserve's corresponding action to raise interest rates has increased the risk of a recession, which would undoubtedly pressure Target's results. But clearly, people like to shop at Target, and its long-term prospects remain bright.
Getting paid to wait
While waiting for results to improve, investors can rely on ever-higher dividends. In June, the board of directors announced that it was raising the quarterly payment from $0.90 to $1.08. This makes 51 straight years of higher payouts, qualifying Target as a Dividend King.
It's always a positive sign when a company feels confident enough to raise dividends. And Target has quite a track record of doing so in all kinds of market conditions, which investors can take comfort in. Despite issues this year that have hurt profitability, it has a payout ratio of 40.6%. This is a level that indicates it can comfortably continue paying dividends.
Throughout its long history, Target has thrived despite difficult economic times. The company has differentiated itself by selling a wide range of unique merchandise, and using technology to integrate its store and online experiences.
Growing sales will have Target's earnings back on track at some point, and it has a strong commitment to raising dividends. The powerful combination makes the stock an enticing opportunity.
