What happened
Target (TGT -0.43%) dropped 12.6% last month, according to S&P Global Market Intelligence. The stock tumbled after a number of important economic data points fueled investor fears that the company's weak financial results would continue for the next few quarters.
So what
Target has shown some weakness in recent quarters. Revenue growth stalled, inventories grew, and gross margin contracted. That's a bad combination for retailers.
TGT Revenue (Quarterly YoY Growth) data by YCharts.
However, none of that news broke in September. Instead, Target's recent financial results are setting the stage for a downturn based on macroeconomic pressures.
Times are tough for retailers right now. Consumers are getting squeezed from all angles -- inflation, limited access to credit, and high interest rates, thanks to the Federal Reserve's efforts to fight inflation.
Macroeconomic data scared investors in September. Spending on goods was weak, relative to other retail categories including fuel and leisure activities. Activity in housing, automotive, and durable household goods indicated weakness, and these are usually clear warning signs of a struggling consumer.
In the face of all this data, the Fed announced that it would continue to prioritize controlling inflation at the expense of economic growth. It seems that these economic pressures are here to stay for at least a few quarters.
Image source: Getty Images.
Target finds itself in an awkward spot among consumer stocks. It's not a niche or luxury retailer that can capitalize on a recession-resistant class of affluent customers. It doesn't have the benefit of lying on the other end of the spectrum as a low-cost substitution that consumers favor when household budgets get tight.
The company's exposure to cyclical discretionary goods means that it's likely to deliver volatile financial results and stock performance when economic stability is threatened. With September's economic news, it's easy to see how Target stock struggled.
Now what
There's not much to like about Target's short-term outlook. However, it's become a compelling value stock, based on price. The stock is near its cheapest level in years, relative to dividends, forward profits, and earnings before interest, taxes, depreciation and amortization (EBITDA).
TGT EV to EBITDA data by YCharts.
That discount suggests that the company is entering a phase of long-term decline, but that might not be the case. Target has one of the strongest brands in the retail space. It's aiming to improve its offering with investment in a last mile delivery service that should improve its competitive position.
Looking backwards, Target is a Dividend King that's increased its dividend for 52 consecutive years. The pedigree and long-term outlook are still overall positive, so the recent sell-off could represent an attractive entry point.
