Target Stock: A Closer Look at Target Stock and Why It’s Down Significantly
Target stock may be on investors’ minds after a turbulent month for retail stocks. The S&P 500 Retailing Index has been down nearly 25% over the last month. Target (NYSE: TGT) stock has fared worse than the index, down over 36%. Both are down more than the broader S&P 500 stock index, which has shed over 8% of its value over the same time.
Target is not the only retailer being hit. Other large U.S. retail stocks have also felt the pain recently. For instance, Walmart (NYSE: WMT), one of the world’s biggest retailers, is down over 23% for the month. In addition, wholesale grocer Costco (Nasdaq: COST) has fallen more than 25% in the month.
The decline in retail stocks follows a similar fall in growth stocks that started earlier in the year. The Vanguard Growth Index Fund ETF (NYSE: VUG) tracks growth stocks. The ETF is down almost 29% this year. It looks like some of the same things that hit growth stock are now working their way into retail stocks. Let’s take a closer look at what is causing the route.
Why is Target Stock Down?
A number of things have hurt retail stocks, especially Target stock. First, inflation in the U.S. is as high as its been in about 40 years. The good news is that demand for retail products has been high since the onset of the COVID-19 pandemic. Folks received stimulus checks and spent less on leisure things like dining out, going to the movie theater and traveling. Therefore, they had extra cash to spend.
The bad news is that the supply chain that moves retail products from the manufacturer to the store was harmed by COVID-19-related lockdowns. Workers who drive delivery trucks and handle packages in warehouses could not go to work. When demand is up, and supply is down, prices soar.
Therefore, retailers like Target end up paying more for the items they sell to customers. When Target pays more for the things they sell, profits go down.
On top of that, growth may be hard to come by in the near term. For instance, Target had great years in 2020 and 2021. Sales in the fiscal year ending in January 2020 grew from about $77 billion to over $92 billion. Then grew to nearly $105 billion in the fiscal year ending January 2022. The sales figures for those two years were much higher than in the last ten years.
As supply chain issues and inflation persist, investors may believe that Target won’t be able to grow sales and profits above current levels. Those fears may be why Target shareholders are selling the stock.
Target Stock Earnings
On May 18, Target put out a press release about its first-quarter financial results. The press release said that the company had sales grew 4% over the same quarter last year to $25.2 billion. Despite the sales growth, Target made adjusted earnings per share of $2.19. The earnings per share were down over 40% from the same quarter last year.
Industry analysts thought Target would report adjusted earnings per share of $3. So, Target widely missed analysts’ expectations, and the stock dropped after the report.
In the press release Target CEO Brian Cornell addressed inflation as a cause of the company’s low quarterly profits when he said, “Throughout the quarter, we faced unexpectedly high costs, driven by several factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time.”
After the report, managers from Target hosted a webcast to talk about the results. When they finished their talk, the managers took questions from listeners. If interested, you can find a link to a replay of the webcast here.
Target Stock Forecast
Target put out a press release about its full-year 2021 financial results in March. In the press release, Target made forecasts for the full-year 2022 about its sales growth and operating margin. The company said that it thought sales growth would be low-to-mid-single digits percentage. They also said they thought the operating margin would be about 8%.
Later, in the first quarter press release, Target lowered its forecast for the year. Though they still believe sales will grow low-to mid-single digits, they also think the operating margin will only be about 6%. The decrease in its forecast may be because of supply chain problems and inflation.
Industry analysts think Target will make adjusted earnings per share of $11.08 on average. Interestingly, all 11 analysts have lowered their forecast over the last four weeks. The lowered forecasts may also reflect supply chain and inflation concerns.
On August 17 at 8 a.m. EDT, Target managers will host another webcast to talk about financial results for Target’s second quarter of 2022. After the managers speak, they will take questions from listeners. If you’re interested in following Target stock you can find a link to the webcast here.
Is it a Good Buy?
A quick valuation of Target stock shows that the stock is trading at a P/E ratio of less than 13x. The current P/E ratio is well below its five-year average of about 17x. This means Target stock could be a good value to shareholders.
If you’re thinking about buying Target stock, you should also think about risks. For instance, if the supply chain and inflation that have hurt Target over the last serval months keep up, the stock could continue to slide.
There is a silver lining to the stock’s decline. Target has continued to pay a dividend to shareholders through all the problems. Because the stock has fallen and the dividend has remained, the dividend yield on Target stock has risen to about 2.32%.
Another silver lining came in the form of share buybacks. When stock companies buy back shares, it reduces the number of company shares. Therefore, profits are split between a lower number of shares. All else being equal, share buybacks can improve earnings per share and the P/E ratio for the stock.
Target bought back about $10 million of stock during the first quarter and retired 100,000 shares. As the share price declines, the money that Target uses to buy back shares can retire a higher number of shares. If Target stock recovers, the share buybacks could prove to be very timely. Shareholders could benefit accordingly.
About BJ Cook
BJ Cook is a long-time stock nerd. He has held several roles in the equity research world and earned the right to use the CFA designation in 2014. When he’s not writing for Investment U, you can find him searching for new investment ideas. Outside the investment community, BJ is a die-hard Cubs fan.