During early pandemic times, Target (TGT +0.94%) showed the strength of its e-commerce platform and contactless pickup and delivery systems, and over five years, the retailer was able to grow revenue by $30 billion. Though Target's revenue has remained in this new range of more than $100 billion annually, it's struggled to grow from here, and this has been due to a variety of problems – from theft in its stores to customers spending less on discretionary items.
All of this has led to poor stock performance and disappointed shareholders. As the S&P 500 roared higher this year, Target missed out on the rally and instead is heading for a decline of about 32%. Meanwhile, the company this year made big moves to turn things around, creating an "enterprise acceleration office," or office to focus on efficiency, in May, and later announcing plans to transition to a new chief executive officer. Current chief operating officer Michael Fiddelke will replace Brian Cornell in the role as of Feb. 1.
With Target shares down in the double-digits, is this a once-in-a-lifetime buying opportunity before the stock goes parabolic? Let's find out.
Image source: Getty Images.
Target's troubles
As mentioned, Target's business was going strong in early pandemic days, and this helped the retailer make major gains in revenue. But, as interest rates rose, and consumers worried about their wallets, they focused on buying essentials and cut spending on items they didn't immediately need. This favored companies such as Walmart because grocery makes up more than half of its annual revenue -- but this trend hurt Target as the company depends much less on grocery and more on discretionary purchases.
Other problems, such as theft in stores and complaints from customers about long lines at the register, also have weighed on revenue at Target. All of this has held back growth -- for example, in the latest full year, net sales slipped 0.8% and earnings per share fell 0.9%. But the company has seen positive trends in recent months, such as more traffic and stronger sales trends in stores.
NYSE: TGT
Key Data Points
And the company is taking steps to further boost growth. Target, which has fulfilled online orders through its stores, now is rolling out a plan to continue doing that only in certain stores -- this could streamline processes, resulting in fewer out-of-stock items and better customer service.
More recently, Target announced it would cut 1,800 corporate jobs, or 8% of the company's global corporate team. "Too many layers and overlapping work have slowed decisions, making it harder to bring ideas to life," Fiddelke wrote in a memo to employees.
Billion-dollar brands
These moves may help Target progressively return to growth, and the company's other strengths -- such as a fantastic portfolio of billion-dollar owned brands -- may have the opportunity to shine. These brands are a significant asset because they are higher margin for Target, and many of them, such as the Cat & Jack children's clothing line, already are popular with shoppers.
Considering all of this, does now, with Target down in the double digits, represent a once-in-a-lifetime buying opportunity? Target stock today is cheap at only 12x forward earnings estimates after declines over the past few years.
TGT PE Ratio (Forward) data by YCharts
Target still faces the challenge of its reliance on discretionary spending, making it a higher risk buy than a stock like Walmart. And it's impossible to say how long it will take for Fiddelke's plan to deliver results -- or even guarantee that the plan will work.
But there's reason to be optimistic that the retailer will progressively gather positive momentum: Target has been taking wise steps to return to growth, and since Fiddelke already had been working on this problem before being offered the CEO position, he may have what it takes to get this job done. All of this means that now, at today's bargain levels and while the stock is out of favor, might be a good time to get in on the story -- and with any potential good news, Target stock could go parabolic.
