Target (TGT 0.18%) has been one of the more impressive brick-and-mortar retail turnarounds of the past decade. It seemed that Target's e-commerce efforts would be stifled by Amazon and the low-cost focus of Walmart would take any upside in big-box retail, but the company leaned into its physical footprint as an advantage rather than a hindrance.
In the last few years, Target's intersection of digital and physical retail developed into a powerful mix. Customers can go into stores to shop, but they can also order online and have items put in their car without ever getting out. You can even throw in a barista-made drink from an in-house Starbucks for good measure.
These various efforts brought Target back to relevance, and it's the key to the company's future as well.
Target's solid footing
You can see in the chart that Target was one of the beneficiaries of the pandemic, with Pickup, Drive Up, and Shipt driving sales growth. And the company has held on to most of that growth as the pandemic waned. What's changed is the margin profile, which has been down in recent quarters.
TGT Revenue (TTM) data by YCharts
Some of the drop in margins is easily explainable. In 2022, Target ordered inventory that would have sold well during the early part of the pandemic, only to see that customer needs had changed as people started to go back to work and changed their day-to-day activities. This left the company with excess inventory like outdoor furniture that needed to be sold at a discount. Margins have returned recently, but we don't have enough data to know if margins will return to historical levels.
What you do see is that Target is solidly profitable on the higher revenue base. This is good news as the company shifts to more owned brands like Good & Gather, which should push margins higher. And if the digital plus physical strategy continues to grow, this could be a slow and steady growth retail stock.
Target's value is too good to pass up
The growth seen at the start of the pandemic isn't likely to return, but I think the combination of digital and physical changes Target is making is starting to pay off. And Target is still early remodeling old stores or building new ones that are designed specifically for services like Drive Up.
Despite all of this growth and progress both strategically and financially, after a recent sell-off, the stock is cheaper than it's been in years.
TGT PE Ratio data by YCharts
The price-to-sales multiple may be the most striking because it doesn't include any volatility from 2022's inventory losses. And if margins rise as inventory returns to normal and management completes reformatting stores to be built for Drive Up, the price-to-earnings multiple may end up looking cheap.
The future is bright at the right price
Target isn't the kind of stock you want to pay a premium for, but at the right price, the stock is attractive. The last three years have shown that customers value the new options at Target like Drive Up and Shipt, and now management is leaning into those services by adding Drive Up canopies to 200 stores this year and reconfiguring some stores to accommodate more of these services.
In five years, I think Target will be seen as more of an omnichannel retailer with fast pickup than it is today. That'll drive slow but steady growth in products like grocery and everyday items. That's Target's bread and butter, and if the company can improve margins and slowly increase the dividend, this could be a market-beating stock.
Retail is a tough business, but Target has the brand and infrastructure to be a strong competitor against companies like Amazon and Walmart long term.
