Target (NYSE:TGT) stock got a big boost from its fiscal fourth-quarter earnings report, which contained the all-important holiday shopping season. Over the past year, TGT stock has risen almost twice as much as the S&P 500, with shares up more than 23%.
The post-earnings rally halted a sharp decline that began in mid-November. On Nov. 15, TGT stock hit an all-time high near $269. On the eve of the company’s earnings report, shares closed below $200, for a 26% drop in 15 weeks.
In addition to broader market weakness, investors were concerned about how inflation and supply chain disruptions would impact retailers. According to Target’s latest report and forecast, these concerns were misplaced.
Target Delivers Earnings Surprise, Upbeat Forecast
On March 1, Target reported earnings for its fiscal fourth quarter, which ended Jan. 29. Revenue was up 9% year over year to $31 billion but just shy of the $31.39 billion expected. However, the bix-box retailer delivered a big surprise on earnings.
Net income rose nearly 12% from a year ago to $1.54 billion, or $3.21 per share, a record for the company. And adjusted earnings of $3.19 per share blew past the consensus estimate of $2.86 per share.
But a good deal of investors’ enthusiasm, which drove TGT stock up 10% on the day, was likely due to the company’s bullish outlook for the year ahead. Management expressed confidence that revenue and profits would continue to grow despite supply chain issues and tough pandemic comparisons.
What’s clear from recent results reported by Target and smaller retailers like Nordstrom (NYSE:JWN) is that inflation is contributing to expanding margins rather than compressing them as some investors feared it would. Not only has inflation allowed retailers to raise prices, but rising prices have spurred shoppers to buy in anticipation of still-higher prices in the future.
Target’s handle on its costs and margin prompted Deutsche Bank to raise its price target on TGT stock from $305 a share to $353 a share, implying upside of more than 65% over the next year.
The Cornell Legend
If you’ve read my past musings on Target, you know that I attribute much of the company’s success to Chief Executive Officer Brian Cornell.
A 2014 computer breach that led former CEO Gregg Steinhafel to resign became a blessing in disguise. Successor Brian Cornell, the first Target outsider to become CEO, has since become a retailing legend.
As I wrote way back in 2018, Cornell transformed Target. His first step was to put money into new brands with name-brand quality and cachet, like Cat & Jack kidswear. He also spent cash to remodel stores and open urban locations that delivered a contrast with the giant suburban centers of Walmart (NYSE:WMT), with which it’s often compared.
Cornell has improved Target’s online sales operations with same-day delivery. And by beefing up its food section, Target became an essential merchant during the pandemic, which also helped growth.
As a testament to Cornell’s leadership, he has created his own management “coaching tree.” Former Cornell lieutenants now run Lowe’s (NYSE:LOW) and Bed, Bath & Beyond (NASDAQ:BBBY).
TGT Stock is Still Cheap
Target shares are currently trading about 6% above where they were before earnings were announced. Yet, even with the post-earnings run-up, TGT stock has a price-to-earnings ratio of around 15.
Target’s quarterly dividend has increased 50% over the past five years and now stands at 90 cents for a yield of 1.6%. If you’re concerned that the dividend no longer beats the 10-year U.S. Treasury bond, keep in mind that the average annual return for TGT stock over the past five years is more than 30%.
General market nervousness, rather than Target’s own performance, is behind the sell-off in shares, including today’s 5.6% drop.
The Bottom Line on TGT Stock
The recent weakness in TGT stock presents a buying opportunity.
Cornell is just 64 years old, but after eight years at the top, he has gathered a quality team under him. The wind is at the back of all big-box stores, which have the financial heft to maintain supply chains. Target’s online strategies are also still bearing fruit.
TGT stock is exactly what you want in a long-term investment. You have a chance to buy shares of a good company when they’re out of fashion and let time work its magic.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.