Down 40% In 2022, Is Target Stock a Buy?
June 21 2022 - 7:20AM
Finscreener.org
Shares of retail giant
Target (NYSE:
TGT) have grossly underperformed the markets in 2022.
While the S&P 500 index is slowly inching closer to
bear-market territory, Target stock is down 41% from all-time highs
and has slumped 48% year to date.
Target reported its quarterly
results on May 18 and disappointed investors. Wall Street forecast
Target to report earnings of $3.06 per share while Target’s actual
earnings came in much lower at $2.19 per share. The company’s stock
price fell off a cliff, losing over 25% and it hasn’t yet
recovered. It closed on June 17 at $139.30.
Until the numbers came in, Target
stock was down just 7.18% in 2022 compared to the S&P 500’s
loss of over 14%. Let’s see if the retail behemoth should be part
of your portfolio in 2022.
A look at Target’s Q1 earnings
Target’s numbers for Q1 2022
missed its own guidance and market expectations as well. Sales grew
3.3% compared to the corresponding quarter in 2021. Store sales
were up 3.4% and digital sales grew 3.2%. However, over 95% of
TargetU+02019s first-quarter sales came from their stores. Sales
growth was powered by the following categories: Food &
beverage, beauty, and household essentials.
Target said that the reason why
it missed expectations was because, “Operating margin rate of 5.3%
was well below expectations, driven primarily by gross margin
pressure reflecting actions to reduce excess inventory as well as
higher freight and transportation costs.”
In
an interview with CNBC, Target CEO Brian Cornell said, “The
mix of the [product] categories looked very different than we
expected. We saw great strength in food and beverage and household
essentials. Our beauty business grew by double digits. But we
started to see some softening in some of the discretionary
categories… TVs, kitchen appliances, bikes. And as consumers
started to shop differently… that certainly impacted our mix and
our margin mix. But it’s also added complexity in our supply
chain.”
In the interview Cornell said
that the company’s profitability wasn’t as expected, and it didn’t
expect the kind of increases it incurred in freight and
transportation costs. The company estimates that the increase is
going to cost them a billion dollars and that the increased
complexity in its supply chain will add pressure to its operational
income.
Earlier this week the company
stated it will reduce prices on several products due to lower
consumer spending. Target will also cancel orders from a few
vendors to reflect the change in consumer behavior. As inflation is
gaining pace, customers are focusing on purchasing essential items
that include groceries and back-to-school
supplies.
Target also expects an operating
margin of just 2% compared to its earlier forecast of 5.3%. The
less than encouraging forecast drove TGT stock lower by
5%.
Target is fundamentally strong
Target has been
consistently beating
the broader markets. In the last
five years until its May 18 earnings, TGT stock grew at a CAGR
(compounded annual grow rate) of 32.45%. If you include the last 20
days, the rate comes down to 23.13%, still a very impressive
number.
Target is one of the largest
retailers in the market and it has very few competitors. The
company’s Q1 numbers marked 20 consecutive quarters of sales
growth. This is a stellar achievement by any measurement. Target
has had to face multiple headwinds in the quarter and the fact that
its numbers still grew (albeit at a slower pace) underline its
strong fundamentals.
To put it simply, Target
overstocked its inventory as it completely misinterpreted consumer
demand. The problem Target faced was that it overstocked in
categories where consumer spending slowed down massively, and it
was left with too much inventory.
Target had one bad quarter but
that doesn’t take away anything from the long-term prospects of the
company. If anything, the drop in price could be construed as a
bargain opportunity. The average analyst target price for Target
stock is $209.23 which is a potential upside of almost 30%. Target
is also a Dividend King considering it has increased its dividend
payout for the last 50 straight years.
Economists also predict a
recession in the offing. Target is a company that has been through
multiple downturns and should be able to navigate this one as
well.
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