Target Stock: Too Cheap To Ignore?

Not many retailers can match Target (NYSE: TGT). The company is one of just a handful of multi-category retailers in the U.S., along with Walmart and Costco Wholesale, selling everything from food and beverages to toys, electronics, apparel, home goods, and health and beauty products, among others. Target also has stores in all 50 states, has store models that fit the urban, suburban, and rural markets, and appeals to all income demographics.

Unfortunately, that balanced approach to retail hasn't been enough to make Target successful lately. The stock has struggled amid weakness in consumer discretionary spending and internal problems like an increase in theft. Over the last three years, the stock is trading down 49%, even as peers like Walmart and Costco have outperformed.

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A mixed fourth quarter for Target

Target shares sold off further following its latest quarterly update last Tuesday. Better-than-expected results weren't enough to overcome a weak February and management's warnings about the effect of tariffs. In the fourth quarter, comparable sales rose 1.5%, driven by digital comp sales growth of 8.7%. Revenue was down 3.1% as it lapped a quarter with an extra week in the calendar to $30.92 billion, but that was ahead of the consensus at $30.38 billion.

However, profit margins fell, with gross margin down from 26.6% to 26.2% due to higher digital fulfillment and supply chain costs, as well as increased markdown rates. Higher employee pay and benefits lifted selling, general, and administrative expenses as a percentage of revenue from 18.8% to 19.4%. As a result, adjusted earnings per share fell from $2.98 to $2.41, though that still beat estimates at $2.25.

Target's guidance for 2025 was mixed. The company sees flat comparable sales and overall revenue up 1%. On the bottom line, it expects earnings per share of $8.80 to $8.90, in line with the $8.86 it reported in 2024.

Target's challenges are persisting

It's clear from the decline in earnings per share and its guidance for 2025 that Target continues to face headwinds. While the company did score some victories in Q4, including in digital comps growth and areas like apparel and hardlines, the decline in profits overshadowed those improvements.

Through February, management noted headwinds from weakening consumer confidence and it expects pressure from tariff uncertainty. But the company is also investing in the business, opening 20 new stores in 2025 and spending on remodels as well.

The company also forecasted an additional $15 billion in retail sales over the next five years. It sees opportunities to grow market share in many of its categories, grow sales through same-day delivery, improve its supply chain and stores, and continue to grow its media business, building out an online advertising business like Amazon has.

Target may need some help from the macroeconomic environment, and it's unclear when that might come, but the long-term picture still looks promising.

Is Target a buy?

After falling roughly 50% in the last three years, Target stock now trades in value stock range, at a price-to-earnings ratio of just 13, about half of the S&P 500. Target is also a Dividend King and currently offers a dividend yield of 3.8%, more than double that of the S&P 500.

Target's guidance essentially calls for a stagnant 2025, but the company still has several competitive advantages. These include its collection of owned brands, its unique positioning as a broadline retailer known for "cheap chic" items, and its omnichannel mix of stores that are within 10 miles of three-quarters of the U.S. population and a range of same-day fulfillment options.

After its recent challenges, there's a lot of upside potential in the business if it can return its margins to earlier levels. With time, Target's business should be able to recover, as it still seems well-positioned for the modern retail environment.

Investors will have to be patient, but Target stock should pay off for long-term investors. With macroeconomic noise like tariffs, 2025 could be a tough year, but the stock is cheap enough at the current level that it should be a winner over the long run.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Amazon and Target. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.