The tailwinds of the pandemic have fully faded for retailer Target (TGT). Comparable sales are flatlining, digital sales are slumping, and even the company’s popular same-day services like curbside pickup are putting up tepid growth numbers.
Target has made progress reducing inventory levels, but the company is now facing threats on multiple fronts. Inventory shrink, partly driven by theft, is expected to reduce the bottom line by more than $500 million this year. And, as noted by an analyst at KeyBanc, the resumption of student loan payments later this year could zap the spending power of Target’s customer base.
A more reasonable valuation
Target stock soared during the pandemic years as the company leaned into the digital side of its business. Target produced revenue of $106 billion in 2021, up $28 billion from the pre-pandemic year of 2019. About half of that sales gain came from the company’s stores, and the other half came from digital channels.
At its peak, Target stock topped $250 per share, good for a market capitalization of more than $120 billion. The stock has been in decline ever since, but it still looked too expensive in March. If you assumed that Target’s pandemic-era sales gains were permanent, and that margins would bounce back to pandemic-era levels, you could have justified the stock price at that time. But neither are guarantees.
Target stock has been slumping hard since the company reported its first-quarter results in mid-May. The company expects comparable sales to be approximately unchanged this year, and it sees adjusted earnings per share between $7.75 and $8.75. For comparison, Target produced adjusted EPS of $13.56 in 2021.
Target’s full-year guidance was unchanged, but there’s a lot of uncertainty baked in. The stock has been hammered over the past few weeks, losing nearly 20% of its value since May 15. Shares now trade right around $130.
While Target is facing multiple headwinds, the stock finally looks cheap enough to seriously consider. Valuing Target based on earnings is difficult because the company’s margins are currently depressed, and because it’s unclear where margins will settle over the next few years. But based on sales, Target’s valuation appears to be back to normal.
Target stock was historically expensive relative to sales during the pandemic, but that premium has now fully faded away. Target is now cheaper on a price-to-sales basis than it was right before the pandemic hit in early 2020.
Not for the faint of heart
While Target stock is now trading at a reasonable price, this is not a stock for those looking for quick and easy gains. The company has a lot of work to do to return to robust sales growth and boost its margins to acceptable levels. Things could get worse before they get better, and pandemic-era market share gains aren’t guaranteed to persist.
The good news is that convenience never goes out of style. Target’s expansion of its same-day services won over a lot of customers, and those channels are still growing. In the first quarter, same-day services grew sales by a mid-single-digit percentage, while curbside pickup saw high-single-digit growth. Those are far from pandemic-era growth rates, but it’s still a solid indicator that Target’s investments in these areas continue to pay off.
Target stock has gone out of style. A comeback may take a while, and further declines are possible as the company muddles through a tough environment. But for long-term investors looking to buy a good retailer at a reasonable price, Target stock finally looks like a decent deal.