After blasting to a new all-time high in 2021, Target (TGT 0.18%) stock has been a major disappointment and is currently hovering around a three-year low. Target booked record earnings in 2021 as people shifted their spending away from services toward goods. Its earnings and margins have declined since, leading investors to reevaluate Target.
In hindsight, it's safe to say that the pandemic-induced bump in performance was temporary. The objective now is to see how Target can grow permanently over time.
Let's discuss some strategic moves Target has made to engage customers and why the retail company is putting the right pieces in place to ensure long-term growth.
Image source: Getty Images.
Curbside pickup and returns
There are two key ways to grow sales in retail -- average more sales per store, or build more stores. Target is focused on generating more sales per store, which is the safer option because it requires less spending. And Target has repeatedly said it is implementing a conservative strategy to try to reduce its inventory and be well positioned to endure weakness in consumer spending.
After enduring years of treading water in the wake of Amazon's disruption of the retail industry, Target has since done a masterful job expanding its mobile ordering, pickup, and return options, as well as building out its Target Circle rewards program (more on that later). All these features work together to provide a better customer experience. Through the app, customers can look up an item and find the aisle where it is located. Or they can simply order ahead and do curbside pickup.
Making the returns process as easy as possible has been a long-standing challenge for retailers. Target hopes that its drive-up returns option will build trust with consumers. It also partnered with Starbucks (SBUX 0.47%) so that customers can now order a beverage with their curbside order or return. Since most Target stores feature a Starbucks, this strategy is simply using existing resources more effectively. If it works, it will be an easy way to grow margins and earnings without having to spend a lot of money on new stores.
These ideas were no accident. Target listened to its customers, and the resounding request was to incorporate returns and Starbucks beverage ordering into the curbside offering.
The most important measure of effectiveness is wait time. Impressively, Target said that the average wait time to process a return is within three minutes, which is the same as a curbside order.
Target Circle
Target Circle is the company's free loyalty and rewards program. Using the Target App, anyone can get 1% off their Target order. Target Circle members all get exclusive deals for specific items or a general perk like saving money after spending a certain amount in one order.
During the second quarter, Target hosted Circle Week, which featured savings opportunities for members. Target added half a million new Circle members during the week, which is 3.5 times the average number of new members it gets per week. Target now has over 100 million Circle members.
Responding to customers' needs
Target can't control the business cycle, interest rates, or consumer spending trends. But what it can do is improve the customer experience by listening to customers. Target's app has come a long way in recent years. It now features the ability to save with Circle rewards, ship an item to your house, curbside order, pickup, return, and even get a beverage. Target has essentially improved the three most important aspects of its business -- in-store, e-commerce, and curbside.
A stock worth buying and holding
Target's long-term future looks bright. The company has an incredibly powerful brand and is putting the pieces in place to differentiate itself from other retailers. For long-term investors, this is a much-needed vote of confidence that Target stock is worth owning. For investors who don't own Target, it's a signal that the company is focused on what matters most, and is a green light to buy the stock at its reduced price.
Aside from Target's growth prospects, a core reason for owning the stock is Target's $1.10 per share quarterly dividend and 52 consecutive years of dividend increases, making it a Dividend King. The sell-off in Target stock has boosted the stock's forward dividend yield to 3.4%, which is far higher than the 1.5% yield of the S&P 500. Target's performance may ebb and flow. But its ability to consistently raise the dividend no matter what makes the stock an excellent choice for investors who like generating returns without the need to sell stock or who are looking to supplement income in retirement.
Target continues to be an industry leader that is simply dealing with short-term challenges. When a great business has its stock sell off for reasons that have nothing to do with the long-term investment thesis, that's usually a great time to buy.
