Target (TGT -1.41%) is extremely unlikely to repeat its 67% year-to-date gain in 2027. However, the dividend stock still has a lot to offer for value investors who prefer stability over high-growth picks that come with substantial volatility.
Target's numbers have become financially sound after multiple years of declining sales. The transformation is complete, and a low valuation creates the opportunity for further upside.
Image source: Getty Images.
Target is winning on two major fronts
Target's second-quarter results didn't resemble a retailer getting pinched by Walmart (WMT +1.73%) and Costco (COST -0.17%) for market share. It delivered growth in two critical metrics.
NYSE: TGT
Key Data Points
First, comparable sales were up 3.8% year over year. That means each store, on average, did a little better this year than in the previous one. Target is making more money with its existing locations. Second, foot traffic increased by 3.6% year over year. People are returning to Target, and new people are coming in more often. The result was a 5.3% year-over-year increase in total sales.
Digital sales greatly contributed to overall numbers. Digital comparable sales were up 8.7% year over year, while same-day deliveries surged 25% year over year. All six of Target's core merchandising categories were up year over year as well.
If comparable sales and foot traffic continue to climb higher, these trends should continue. Target raised its full-year guidance from 4% year-over-year sales growth to 5%, showing additional optimism about upcoming results.
This rebound warrants a higher valuation
Despite the rally, Target still offers a dividend yield of almost 3%. Furthermore, it trades at a 17 P/E ratio. Meanwhile, Walmart trades at a 37 P/E ratio.
It's unreasonable for Target to have the same valuation as Walmart. The latter has higher revenue growth rates and more retail locations. Both companies have similar net profit margins, with few options to meaningfully expand those margins since they are in the retail industry.
However, the current gap between these two retail stocks is excessive. Target shouldn't be trading at less than half of Walmart's current valuation. Target has been making more investments in its grocery segment to attract more customers in an attempt to rival Walmart. Target isn't going to dwarf Walmart, but the thought of Walmart and Costco continuing to whittle away at Target's market share isn't as common.
It's unlikely that Target beats the S&P 500 in the long run. The stock is down by more than 30% over the past five years, but these current gains are driven by real fundamental growth. A yield close to 3%, a low valuation, and rising sales should be enough to keep this stock on value investors' radar.
