Target (TGT -0.70%) is one of the best-known big-box retail giants. Yet as the stock market is soaring toward new 52-week highs, Target's shares have fallen more than 8% in the last week -- and 22% in the last three months.
Let's discuss what is dragging the stock lower, and why Target is looking like a great dividend stock to buy now despite some concerns.
Image source: Getty Images.
Concerning price action
Any time you have a well-known blue-chip stock moving down while the market is moving up, that usually means there is a sell-off across the company's sector or industry.
But that's not the case with Target. Over the past month, its stock is drastically underperforming the S&P 500, the consumer discretionary sector, the retail industry, and even peers like Walmart (NYSE: WMT) and Costco Wholesale (NASDAQ: COST).
The first place to look for why Target stock is under pressure would be its earnings. Target reported earnings before market open on May 17. but shares finished the day up over 3%. The damage was done between May 18 and June 1 when Target stock fell a staggering 18.5%.
Mounting pressure
Sometimes when a stock makes a delayed and sizable move shortly after earnings, it's because Wall Street just needed more time to digest the results. But such steep and rapid sell-offs on stocks like Target's are rare. The main reason for the drop from more than $160 a share to $130 a share is likely due to consumer backlash.
Some consumers are boycotting Target to punish the company for displays and merchandise that support certain social groups and communities. No matter where you stand on these issues, there's no denying that Target finds itself in the bullseye of culture wars on social media, which is affecting its brand.
The big question for investors is whether Target's brand and sales will be permanently impacted by these events, or if the news will blow over and the damage will be temporary. No one has a crystal ball. But when issues like this come up, it's almost always a great buying opportunity for a top stock like Target.
Recent examples of stocks selling off for reasons that had nothing to do with their financials include unionization fears for Starbucks and Amazon.com. These issues added downward pressure on both stocks, but ended up being immaterial. Even Elon Musk's acquisition of Twitter and its effect on Tesla was overblown, seeing as Musk recently hired a new CEO of Twitter and has confirmed that his priorities lie with Tesla.
Target's ongoing challenges
For Target, the drop over the last two to three weeks seems unwarranted in the grand scheme of the company. Still, Target isn't exactly firing on all cylinders. The company's trailing 12-month operating margin is just 3.5% although its quarterly operating margin shows signs of improvement.
TGT Operating Margin (Quarterly) data by YCharts
Target isn't used to operating a razor-thin-margin business like Walmart and Costco, which both deploy a high-volume, low-margin business model. Target uses a medium-volume, medium-margin business model, and a higher-end retailer like RH uses a low-volume, high-margin business model. Retail is all about finding a price point that works for the consumer, and Target has done a masterful job at blending price and value.
However, its margins have been under pressure as it mismanaged its inventory in 2021 and has been working to better align consumer demand forecasts with supply. Target's solution is to keep a lid on inventory so it doesn't find itself overextended in the wake of a potential recession. CEO Brian Cornell said on Target's Q1 earnings call:
As it did throughout last year, pressure from inflation and rising interest rates affected the mix of retail spending in Q1 with a further softening in discretionary categories in the March and April time frame. This coincided with a deterioration in consumer confidence, reflecting recent events such as the banking crisis that emerged in March. These continued signs of caution among consumers have reinforced why we enter this year with a conservative inventory position.
Target faces very real short-term headwinds and slowing growth. However, this is a company that has endured multiple cycles and has still delivered on long-term promises to investors.
A compelling investment thesis
The Target investment thesis is centered around steady organic growth that supports dividend raises and share repurchases. Target has done a phenomenal job hitting these objectives over the last decade.
TGT Dividend data by YCharts
Its dividend is up over 150% in the last 10 years, and its share count has fallen by over a quarter, which permanently boosts earnings per share. Even though Target's earnings have fallen off a cliff in recent years, they are still up over 40% in the last decade, which goes to show how well Target is doing even when factoring in the recent slowdown.
Target stock is a buy
Target is a Dividend King that has paid and raised its dividend for 51 consecutive years. The stock has a 3.1% dividend yield, and isn't expensive relative to historic levels. Target may face a one-two punch of short-term challenges if overall consumer spending falls and a select cohort of its customers continue to boycott. But five to 10 years from now, it's hard to see a scenario where Target isn't a far more valuable company than it is today.
