Target (TGT +1.27%) has delivered a fantastic long-term growth story, increasing annual revenue by about $30 billion over the past five years. However, in recent times, Target has failed to keep the growth momentum going as shoppers have watched their budgets, favoring essentials instead of higher-margin discretionary items; as theft from stores has taken a toll; as tariffs have raised prices; and as people have stayed away due to the company's reversing diversity, equity, and inclusion (DEI) efforts.
These elements have weighed on revenue growth and share price performance in recent quarters, and so far this year, Target stock has dropped 28%. Now, you may wonder if this growth problem will continue and further hurt the stock. Or, if this is a once-in-a-lifetime buying opportunity before the stock goes parabolic? There's no way to predict the future, but let's take a look.
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Target's troubles
Target's share performance troubles extend beyond just this year. It's down more than 60% from highs back in 2021. One of the latest headwinds has been President Donald Trump's plan to launch tariffs on imports. The concern is Target and other retailers would have to absorb the extra costs or pass them on to the consumer -- and both scenarios could hurt earnings.
NYSE: TGT
Key Data Points
Though the tariff situation remains uncertain, some bright spots have appeared. Initial trade agreements with the U.K. and China suggest levels may not be as high as initially expected. And Target's own efforts -- such as negotiating with vendors and adjusting product assortment -- could limit impact, too.
Meanwhile, Target, recognizing its growth problem, took a big step to address it recently by creating an "enterprise acceleration office." This team's goal is to speed up progress along the path to growth by reducing complexity across the company. This might include simplifying various processes or using technology in new ways, Target says. Any progress here could drive improvements in earnings in the quarters to come and lift the stock.
What could position Target for long-term success
Target also has some key advantages that could help position it for long-term success. One of these is the company's $31 billion portfolio of owned brands across themes from Art Class apparel for tweens to the Good & Gather food line and Casaluna in bed and bath. Owned brands are a valuable asset because Target has a significant amount of control over costs and potential to generate higher margins. The billion-dollar sales figures of one-quarter of these 40 brands illustrate their popularity, showing they can be major growth drivers for the company over time.
Target's investment in its digital platform and delivery services also is a plus. These elements have continued to grow even during times of lackluster overall revenue. For example, in the latest quarter, digital comparable sales climbed 4.7% and same-day delivery saw more than 35% growth. At the same time, Target has continued to invest in its stores, opening 23 new ones last year, and launching new supply chain facilities to strengthen its fulfillment network. All of this is positive as it should help Target better serve its customers both in-store and online. Investors should watch to see if Target can woo customers back to the bull's-eye.
Target's dividend track record
Finally, while investors wait for Target's growth to take off, they can benefit from the company's dividend payments. As a Dividend King, Target has increased its dividend for more than 50 straight years, showing its commitment to rewarding shareholders. And today, with a dividend yield of 4.6% as I write this, it far surpasses the S&P 500 dividend yield of about 1.2%.
Now, let's get back to our question: Is Target a once-in-a-lifetime buying opportunity headed for parabolic growth? It's impossible to predict when or if a struggling stock might take off, heading sharply upward, but Target is well-positioned to do so at this point, for the reasons mentioned above. And today it trades for only 13 times forward earnings estimates, down from more than 18x a few months ago. Target has reasons to shine over the long term and I think today's valuation looks like a rare buying opportunity to seize before the stock eventually goes parabolic.
