While it’s not completely out of the woods, big-box retailer Target (NYSE:TGT) may deserve a rethink following reasonably encouraging results from Black Friday. Combined with the company’s better-than-expected earnings performance, Target’s core consumer base is demonstrating resilience against aggressive economic headwinds. It’s still a challenging prospect, but the overall de-risked profile of TGT stock makes me moderately bullish on it.
TGT Stock Bounces Higher on a Strong Earnings Print
First and foremost, credit must be given where it’s due. Throughout most of this year, TGT stock appeared to be a money pit. Certainly, the underlying company’s own admission of critical headwinds – perhaps most notably the impact stemming from organized retail theft – cast a dark cloud over the business. At the time, I regrettably shared my bearish thesis. However, Target may finally be emerging out of the swamp.
In the middle of last month, the company reported adjusted earnings per share of $2.10 in the third quarter of Fiscal Year 2023. This tally represented a 36% year-over-year lift and also handily beat Wall Street’s consensus EPS target of $1.47.
On the revenue front, the posted total of $25.4 billion slipped 4.2% against the year-ago quarter’s result. However, it managed to just beat analysts’ estimate of $25.3 billion. To be sure, it wasn’t all great news on the top line, as overall comparable sales fell by 4.9%. Also, digital sales incurred a 6% decline.
Nevertheless, Target Chair and CEO Brian Cornell put a positive spin on the disclosure, stating, “Our team continued to successfully navigate our business through a very challenging external environment. While third-quarter sales were consistent with our expectations, earnings per share came in far ahead of our forecast.”
After languishing for several sessions, TGT stock managed to jump by 18% in the trailing one-month period, and more gains aren’t out of the question based on a surprisingly resilient consumer base.
Target May Benefit from Strong Black Friday Spending
According to The Wall Street Journal, third-party analytics firms revealed that more shoppers visited brick-and-mortar retailers and transacted across various e-commerce platforms on Black Friday this year compared to 2022. That by itself should offer a decent lift in TGT stock, and it’s not just because of the increased sales volume.
Of course, all retailers seek to keep the cash registers ringing. However, Target, as a big-box retailer, stands to be a huge beneficiary of the post-pandemic societal pivot. As you probably know, several physical stores suffered brutal losses during the initial phase of the COVID-19 pandemic.
During that time (Q2 2020), e-commerce transactions represented 16.5% of all retail sales. After a conspicuous erosion into Q2 2022, e-commerce is again experiencing positive momentum. Therefore, the willingness for shoppers to pivot back to brick-and-mortar retail is an encouraging development for TGT stock.
Interestingly, the WSJ stated that consumers relied more heavily on buy now, pay later (BNPL) platforms to conduct their transactions. That’s a point that TipRanks contributor Steve Anderson confirmed, noting that Block (NYSE:SQ) was one of the big winners in this particular financial technology (fintech) space.
On the one hand, the emphasis on BNPL symbolizes a challenge to Target. After all, the big-box retailer offers its own private-label credit card, which customers are eschewing for alternative payment services. However, on the positive end, the transition to BNPL also means that consumers haven’t entirely given up on discretionary purchases.
Return of Pricing Power
At the moment, TGT stock trades at a trailing-year earnings multiple of 17.2x. Considering that the specialty retail sector runs an average earnings multiple of 18.9x, Target is technically undervalued, but not by much. However, that’s arguably not the main focus for investors.
Rather, Target’s gross profit margin of 28.54% in Q3 deserves closer examination. Not only is it a significant improvement over the 25.79% gross margin printed in the year-ago quarter, but this metric is closing in on Target’s long-term average of about 29% to 30%.
Essentially, the company is witnessing a return of pricing power. That’s huge for TGT stock, considering the broader impact of stubbornly-high inflation.
Is TGT Stock a Buy, According to Analysts?
Turning to Wall Street, TGT stock has a Moderate Buy consensus rating based on 14 Buys, 13 Holds, and zero Sell ratings. The average TGT stock price target is $151.04, implying 13.4% upside potential.
The Takeaway: TGT Stock May be Making a Comeback
Although not all of Target’s challenges have disappeared, the company gave itself a jolt of credibility with a better-than-expected earnings print. In addition, the retailer benefits from a consumer base that’s willing to make their dollars stretch despite various economic headwinds. As a result, the upside narrative for TGT stock is reasonably believable.