Target Corporation's (TGT -0.65%) shares tumbled 19.8% last week after reporting 2024 third-quarter earnings that fell short of expectations. The sell-off came as the retailer reported comparable sales growth of just 0.3% and lowered its fourth-quarter outlook, citing cautious consumer spending in discretionary categories.
Yet beneath these disappointing headline numbers lie several encouraging signs. Here's why I'm viewing this sell-off as a chance to add to my position in this retail leader.
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Digital growth amid retail headwinds
Despite missing Wall Street's expectations, Target's 2024 third-quarter results revealed several bright spots. Digital comparable sales grew 10.8%, with same-day delivery services surging nearly 20% compared to the same period last year. Even with consumer spending pressure, store traffic increased 2.4% year-over-year, showing Target continues attracting shoppers to both its physical and digital channels.
This strength in both digital and store traffic validates Target's long-term investments in omnichannel retail. The company has built an efficient fulfillment model where over 97% of sales are fulfilled through existing Target stores rather than separate warehouses, allowing faster delivery times and better inventory management across channels. This integrated approach to serving customers, whether they shop online or in stores, provides Target with a durable competitive advantage in modern retail.
Beauty and essentials provide stability
Target's growth isn't solely dependent on discretionary spending. Beauty comparable sales grew more than 6% in the third quarter, while food and beverage and essentials categories saw low single-digit growth. This diversified portfolio helps buffer against economic uncertainty while providing steady cash flow to support dividend payments.
The retailer's exclusive partnerships and private label brands, which account for about one-third of sales, create additional competitive advantages. These higher-margin products help maintain profitability even as consumers become more price-conscious.
A strong balance sheet supporting steady cash distributions
Target's financial strength underpins its dividend reliability. The company has increased its dividend for 53 consecutive years, with the payout growing at a robust 10.7% annual rate over the prior 10-year period. The retailer's 35.6% payout ratio provides ample room for continued dividend growth even amid challenging market conditions.
Management demonstrated this commitment by raising the quarterly dividend by 1.8% this year despite a tough operating environment. The company also has a history of steadily rebuying shares, having lowered its outstanding share count by a healthy 27.7% over the prior 10 years.
TGT Average Diluted Shares Outstanding (Annual) data by YCharts
Investing in future growth
Target isn't standing still during this period of retail uncertainty. The company operates nearly 2,000 stores across all 50 states and continues expanding its footprint strategically. Recent store openings are performing ahead of expectations, validating management's growth strategy.
Furthermore, the retailer's loyalty program, Target Circle, added three million new members in the third quarter alone. This growing base of engaged customers provides valuable data and opportunities for personalized marketing through the company's Roundel advertising business, which saw mid-teen growth in Q3.
Time to embrace the dip?
While Target faces near-term pressures from cautious consumer spending and elevated costs, its fundamental story remains intact. The current valuation of just 11 times 2027 estimated earnings suggests the market is overlooking Target's long-term earnings power and dividend growth potential.
Moreover, Target's ongoing investments in its stores, digital capabilities, and loyalty program position it well for retail's next chapter. With a 3.58% yield at current prices, investors are being paid handsomely to wait for the retail environment to improve. For long-term dividend investors, these periods of market pessimism often provide the best opportunities to build positions in quality companies at attractive prices.
I'm using this opportunity to add to my stake in this dividend growth stalwart, confident that Target's combination of retail innovation and shareholder returns will reward patient investors in the years ahead.
