Investors in Target (TGT -0.65%) may struggle to imagine an earnings report worse than the one released for the third quarter of 2024. The stock fell by 22% in the following trading session as the company released disappointing results.
With that, Target's stock price has fallen to lows last seen more than one year ago. Now, the question for investors is whether that means the pessimism is overdone, or is Target a stock that investors need to avoid? Let's take a closer look.
Target's third-quarter earnings
Admittedly, Target's recent financials are not likely to inspire most investors. In the third quarter of 2024, revenue came in at just over $26 billion, an increase of just under 1% from year-ago levels. This included a comparable sales increase of only 0.3%. Although digital sales surged 11% higher during that time, those did little to offset the dismal in-store performance.
On the Q3 2024 earnings call, CEO Brian C. Cornell blamed cautious consumer spending for the modest increase. The lower-than-expected sales led to a spike in inventory, with its $15 billion in inventory increasing more than $3 billion from last year's levels.
Unfortunately for Target, operating expenses rose by just over 3%. The company blamed disruptions from the brief port strike, storm activity in the Southeast, and rising healthcare costs for the added expenses. Those factors led to a 12% yearly decline in net earnings, which came in at $854 million for Q3, or $1.85 per share.
Still, the biggest disappointment may have come from Target's full-year guidance. The company now estimates its 2024 adjusted earnings per share will come in at $8.60 per share at the midpoint, well below the $9.35 per share it forecast at the midpoint just one quarter ago.
Additionally, Target's situation may leave investors wondering where the company will find growth. More than 75% of Americans live within 10 miles of a Target, and with no apparent inclination to expand internationally, one may wonder how Target will drive growth longer term.
The state of Target stock
Such a performance led to Target stock setting new 52-week lows. Consequently, the company has barely eked out a positive total return over the last five years, a concerning situation for investors.
However, the current state of Target stock might appeal to growth and income investors.
The high inventory levels and cautious consumer spending are likely cyclical challenges that should improve over time. Moreover, these struggles are likely priced into Target stock. Amid its difficulties, the P/E ratio has fallen to about 13, a level close to five-year lows and far below the valuation of its largest competitors.
TGT PE Ratio data by YCharts
Furthermore, Target's annual dividend of $4.48 per share now has a return of 3.6%. This is approximately triple the dividend yield of the S&P 500, which offers investors a return of just over 1.2%.
Target is also a Dividend King, with a dividend increase streak of 53 years. While that situation boosts confidence in the stock, it also implies much of the value of Target stock hinges on these annual payout hikes. Thus, Target is likely to continue this streak, which should bolster confidence in the company's steady, rising income stream.
Investing in Target stock
Although Target looks like a troubled stock under current conditions, the buy case for the company appears unexpectedly strong.
Indeed, sales levels are lackluster, and challenges such as rising inventory and a relative lack of expansion options appear concerning.
Nonetheless, investors should remember that the company remains profitable despite its troubles. Moreover, its 13 P/E ratio likely means its stock price has more than priced in the company's current challenges. Furthermore, a 3.6% dividend yield combined with a 53-year streak of payout hikes may be too good for income investors to ignore.
As business conditions improve, sales and earnings should begin to rise again. That should not only bolster Target's stock price but also allow it to continue the long streak of dividend increases.
