It has been over a year, but growth finally appears to be back at Target (TGT 0.18%). That was the biggest takeaway from the retail giant's early March earnings update which included other encouraging signs around demand and profit trends.
Target isn't out of its slump just yet. Management is simply calling for a return to comparable-store sales growth in 2024 following last year's decline. Peers like Walmart (WMT -0.08%) and Costco Wholesale (COST 1.01%) are expanding much more quickly, too.
Yet there are some good reasons to be feeling bullish on Target stock right now. Let's dive right in.
Target is stepping toward growth
Investors won't be thrilled by the headline growth number that Target just reported. Comps were down 4% in the key holiday shopping period, executives revealed on March 5. That result stacks up poorly against Walmart and Costco, which are expanding at a solid 3%-4% clip in the U.S. market. And Target reported declining customer traffic and lower spending, reflecting its exposure to the type of consumer discretionary purchases that shoppers are avoiding right now.
Look a bit closer at the report, though, and you'll see why Wall Street was pleased by the data. Target's customer traffic losses improved to below 2% from over 4% in the prior quarter. It nearly returned to growth in the digital sales channel following a 5% drop in Q3. The chain's holiday focus on innovation and affordability paid off and allowed sales to outpace the market in niches like toys and food. "[W]e rallied to change our business momentum," management said.
Operating margin has already recovered
Investors can immediately start benefiting from Target's financial strength while they wait for that growth rebound to take shape. The chain's operating margin already expanded to 6% of sales in late 2023 compared to 4% of sales a year earlier, effectively returning the business to the level of profitability that shareholders enjoyed before the pandemic volatility.
TGT Operating Margin (TTM) data by YCharts
Sure, margins aren't approaching the 10% level that investors saw during parts of 2021. But that spike was clearly an aberration. For now, it appears Target will settle at a higher margin than national retailing peers like Costco.
Values and prices
And yet the stock is still valued as if its business won't recover its positive momentum anytime soon. Shares are trading for 0.75 times sales, or about the same premium that's been assigned to Walmart, which is less profitable. Investors were paying 1.5 times sales for Target at the 2021 peak and closer to 1 times sales before the pandemic struck.
That's a tempting discount for a business that should be setting sales and earnings records by late 2024. Cautious investors might want to wait until midyear when there will be more concrete signs that Target is on the rebound. But if you're OK with a bit more risk and are a fan of dividend stocks with long track records of growth, then consider adding Target to your watch list today. Its yield is sitting at 2.6% even following the recent share-price spike, making it one of the most generous retailers on that key metric. This income should help boost returns while you wait for business trends to accelerate in 2024 and beyond.