I've Been Wrong About Target's Stock for 5 Months. Here's Why I'm Finally Changing My Mind.
Key Points
Target’s stock rallied this year as its comps and margins improved.
It still looks cheap relative to its long-term growth potential.
Five months ago, I predicted that Target's (NYSE: TGT) stock would stay flat for the rest of the year. At the time, I claimed the retailer's cooling comparable sales growth, shrinking margins, and CEO change would drive away the bulls.
However, Target's stock has risen 24% since then. Let's see what I got wrong about Target -- and why it might be worth buying again as a long-term investment.
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What did I get wrong about Target?
Back in March, I assumed Target's comps -- which had declined for four consecutive quarters -- would continue falling. It was grappling with inflation, stiff competition from Walmart and Amazon, sluggish sales of larger products (appliances, TVs, and furniture), supply chain disruptions, and shoplifters at some of its stores. It also faced politically driven boycotts from both left-leaning and right-leaning consumers.
However, Target's losing streak ended when it reported earnings for the first quarter of fiscal 2026 (which ended on May 2). Its comps rose 5.6% (4.7% at its stores and 8.9% across its digital channels), and its total revenue increased 6.7%. It also raised its full-year revenue growth guidance by two percentage points to 4% and anticipates net sales growth in "every quarter."
That recovery was driven by rising store traffic (up 4.4% in the first quarter), new products in high-growth categories such as food, health, wellness, and beauty, as well as limited-time partnerships with Woolrich, Parke, and the Pokémon Company. That stabilization indicates that Target can continue to grow its top line without aggressive markdowns or price hikes.
Target also expects its adjusted operating margin, which dipped 60 basis points year over year to 4.6% in fiscal 2025, to improve more than 20 basis points this year as it sells higher-margin products, reins in its markdowns, mitigates its shoplifting issues, streamlines its supply chain, and expands its higher-margin advertising and digital marketplace segments. It's also eliminated hundreds of corporate jobs and shaken up its C-suite this year to reduce its excess expenses.
Why is Target's stock still worth buying?
At $150, Target's stock still looks like a bargain at 18 times forward earnings. It also pays an attractive forward yield of 3.1%. It's raised its payout annually for 55 consecutive years, making it a Dividend King that has maintained that streak for at least five decades.
Target seemed to be in serious trouble last year. Yet its new CEO, Michael Fiddelke, is clearly reigniting the retailer's growth engines as it trims its fat. Therefore, it's a good idea to buy some more shares of Target today before its surprising turnaround attracts even more attention.
Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.