Target (TGT 2.70%) posted its fourth-quarter report on Feb. 28. Its revenue rose 1.3% year over year to $31.4 billion, beating analysts' estimates by $670 million, and comparable-store sales grew 0.7%. Adjusted earnings declined 41% to $1.89 per share, which still cleared the consensus forecast by $0.49 per share.

Target's stock rose slightly after that earnings beat, but it remains nearly 40% below its all-time high in November 2021. Should investors buy a few shares of this out-of-favor blue chip retailer as the bulls look the other way? 

A shopper pushes a grocery cart through an aisle while holding a smartphone.

Image source: Getty Images.

What happened to Target over the past year?

Target generated robust growth throughout the pandemic as more shoppers stocked up on groceries and consumer goods. Its digital sales also surged as more people stayed at home and shopped online. Stimulus checks amplified all that spending. 

Target's comps increased 19.3% in fiscal 2020 (which ended in January 2021), then grew 12.7% in fiscal 2021. But in fiscal 2022, its comps only rose 2.2% and decelerated on a quarterly basis throughout the entire year.

That slowdown was caused by tough year-over-year comparisons to its pandemic- and stimulus-induced growth in fiscal 2021, as well as the impact of inflationary headwinds on consumer spending. That softer demand, which was exacerbated by supply chain disruptions preventing it from quickly refreshing its products, caused Target's inventory levels to soar.

The giant retailer tried to use markdowns to reduce those inventories, but that strategy -- along with elevated freight costs -- compressed its margins.

Will Target's growth rates stabilize this year?

As the following table illustrates, Target's comps growth continued to cool off in the fourth quarter as its gross and operating margins declined both sequentially and year over year. However, its inventories finally fell 3% -- led by a 13% reduction in its discretionary product inventories -- and ended its streak of double-digit inventories growth.

Metric

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Comps growth (YOY)

8.9%

3.3%

2.6%

2.7%

0.7%

Gross margin

25.7%

25.7%

21.5%

24.7%

22.7%

Operating margin

6.8%

5.3%

1.2%

3.9%

3.7%

Inventories growth (YOY)

30.5%

43.1%

36.1%

14.4%

(2.9%)

Data source: Target. YOY = year over year.

That stabilization suggests the company is successfully right-sizing its inventories to account for softer consumer spending in this inflationary environment. During the conference call, CFO Michael Fiddelke said Target would maintain a "cautious stance on our inventory commitments" throughout 2023 as it navigated the tough inflationary headwinds.

Target expects to post a "low-single digit decline to a low-single digit increase" in comps in both the first quarter of fiscal 2023 and the full year, which reflects its uncertain outlook for the macro environment. Analysts project its reported revenue to rise 2% for the full year.

Target expects its adjusted EPS to decline 13%-32% year over year in the first quarter, but to increase 29%-45% for the full year. That annual growth can be attributed to its stabilizing operating margin and a fairly easy comparison to its 56% decline in adjusted earnings in 2022. However, that still came in slightly lower than analysts' forecast for 49% growth.

A brighter long-term outlook

2023 will be another challenging year for Target. But as its top-line growth decelerates, it plans to strengthen its operating margins by streamlining its spending and prioritizing its investments in e-commerce, delivery, and other features that fortify its defenses against formidable competitors like Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN).

As its business stabilizes, Target expects its operating margin -- which dropped from 8.4% in fiscal 2021 to 3.5% in fiscal 2022 -- to reach and "move beyond" its pre-pandemic rate of 6% over the "next three years." It also believes it could reach 6% "as early as fiscal 2024" if the macro situation improves.

In other words, Target might be stuck in a cyclical rut for now, but it's not stuck in the same sinking boat as struggling retailers like Bed Bath & Beyond (NASDAQ: BBBY). Target's estimated adjusted EPS of $7.75 to $8.75 in fiscal 2023 will also easily cover its annual dividend of $4.32 per share -- which currently represents a forward yield of about 2.6%.

Target is also notably a Dividend King, raising its payout annually for 51 consecutive years. Those consistent dividend hikes, along with its low forward price-to-earnings ratio of 17, should ultimately limit its downside potential even if investors remain unimpressed by its near-term growth.

Target's stock is still worth buying

Target survived the retail apocalypse by expanding its e-commerce platform, using its massive network of 1,948 stores to fulfill its online orders and in-store pickups, and keeping pace with Amazon and Walmart with competitive prices and same-day deliveries. Those strengths should carry it through the current downturn and support its long-term expansion.

Target isn't a great stock for growth-oriented investors, but it's still a good investment for value-seeking ones. It's a stable, blue-chip stalwart that deserves to head much higher once the bear market finally ends.