Shares of Target (TGT 2.55%) are up more than 23% year to date, obliterating the S&P 500's return over the same period. This outperformance was aided by the company's fourth-quarter update this week, which saw better-than-expected profit margins and early signs of a top-line recovery.
With some fresh quarterly numbers to mull over, it is a good time to take a look at the stock and test the market's optimism for the company.
Is the stock attractive here, or has the stock's big gain this year already priced in the good news?
Image source: Target.
A turnaround is in the works
Target's fourth-quarter results showed continued top-line softness but a notable bottom-line improvement, suggesting that the company's operational efforts are starting to pay off.
Target's fourth-quarter revenue fell 1.5%. And comparable sales (sales at stores or digital channels open for at least a year) fell 2.5% during the period.
Despite this revenue contraction, the company demonstrated impressive cost control. Target's non-generally accepted accounting principles (non-GAAP) earnings per share rose to $2.44 -- up from $2.41 in the year-ago quarter.
Additionally, the company's gross margin expanded to 26.6% in the fourth quarter, up from 26.2% in the year-ago period.
While investors would certainly prefer to see both top and bottom-line growth, at least Target is giving investors something to stay upbeat about while they wait for sales growth to turn positive.
Key catalysts
But there are several reasons to believe Target's business could improve further from here.
First, beyond its traditional retail aisles, the company is leaning heavily into alternative revenue streams -- ones that should help bolster profitability. Target's non-merchandise sales grew more than 25% year over year in the fourth quarter. This included triple-digit growth in membership revenue from its Target Circle 360 program and double-digit growth from its digital advertising business, Roundel.
Additionally, management indicated that its sales trends have been building momentum.
"Sales trends have improved in recent months, showing early signs we're on the right path," said CEO Michael Fiddelke during the company's fourth-quarter earnings call.
And this momentum is carrying over into the company's full-year outlook. Management said it expects full-year 2026 net sales to grow approximately 2% year over year. Even more, management forecast earnings per share for the period to be in the range of $7.50 to $8.50, implying about 5.7% year-over-year growth at the midpoint.
The bridge to even faster growth
While it's encouraging to see Target's sales trends improving, investors should keep their expectations in check. After all, we're talking about a guide for anemic 2% year-over-year growth. While this is better than what the company has been delivering recently, it's not particularly notable for a retailer in an intensely competitive environment.
Of course, Target knows that 2% top-line growth isn't good enough. And that's why the company, alongside its earnings release this week, announced a strategic plan for "a new chapter of growth in 2026 and beyond," featuring a plan for about $5 billion in capital expenditures in 2026 ($1 billion more than last year) and an incremental $1 billion in operating investments -- "all in service of accelerating growth," the company said in its press release about the new strategic plan.
"Plans include transforming in-store floor plans and displays, increasing payroll and training to elevate the guest experience, strengthening and evolving the assortment in key categories, and accelerating technology -- including AI -- to make shopping easier and more personalized," Target explained in the release.
NYSE: TGT
Key Data Points
Now, investors have to wait to see whether Target can execute on these plans -- and whether the payoff is as attractive as management hopes. Ultimately, I do think that these investments increase the odds of the company's returning to faster growth and, more importantly, improving the company's long-term prospects. But it's not yet clear that the company will be able to return to meaningful top-line growth rates and then sustain them.
With all of this said, the stock's cheap valuation does a good job of baking in these risks. Shares trade at just 15 times the midpoint of management's 2026 earnings-per-share forecast. In addition, the company pays a robust dividend yield of 4%.
While investors will need to monitor the company closely to ensure Target's investments are yielding results, I do think the stock is a buy.
