Target's (TGT 0.18%) management thinks it has the answer to the company's stubborn customer traffic problem. After losing shoppers for several consecutive quarters, the chain is pivoting its merchandising toward value in hopes of winning back market share over the holiday shopping season.
The move makes sense. Peers Walmart (WMT -0.08%) and Costco (COST 1.01%) are seeing stronger growth thanks to their focus on competitive pricing. Yet Target's sales have declined in 2023.
Target's stock jumped in the wake of its latest earnings report, though, which contained some good news around profitability. Wall Street is also encouraged by the chain's plan to offer thousands of gifts priced under $25 this season. But do these shifts make the stock a buy? Here's what you need to know .
Losing ground
Target's mid-November earnings update didn't change the weak growth narrative that investors have seen for the past year. Comparable-store sales dropped 5% through late October, mainly because of a 4% decline in customer traffic. Shoppers are spending more on essentials such as groceries, as demonstrated by Walmart's 5% comps increase. But they aren't frequenting the home furnishings and consumer electronics aisles that make up most of Target's business.
The good news is that the chain is in a great inventory position, with inventory levels down 14% overall and lower by 19% in the consumer discretionary niche. Management also said that sales trends met their modest expectations even as profitability landed well ahead of targets. Operating profit jumped to 5% of sales from 1.2% of sales a year ago, putting the retailer within range of its pre-pandemic margin of roughly 6% of sales. Walmart's comparable figure is about 3% of sales, in contrast.
The rebound strategy
Target is hoping to take a page from the industry leader's playbook by stressing value over the next few quarters. It's stocking its shelves with thousands of gifts priced at $25 and below, moving it more in line with Costco and its price leadership focus.
Target isn't abandoning the premium branding strategy that's been so successful over the years, though. The chain is still offering tons of exclusive brands for the holiday season, in fact. Management said the goal was to deliver both "newness and value" through the peak shopping period.
Shareholders are hoping the strategy will help end Target's sales slide that's seen comps fall 4% over the first three quarters of 2023. Customer traffic in that period is down 3%, reversing a 3% increase in the prior-year period.
Watch the stock
Investors should watch the stock rather than jump in to purchase it right now. Customer traffic trends haven't stabilized yet, after all, and management projected another quarter of declines ahead for Q4.
Yet there's no denying that the retailing stock is cheap today. Shares are valued at 0.6 times annual sales, compared with Walmart's valuation of 0.7 times revenue. The same trend holds for earnings, with Target available for 17 times profit, compared with Walmart's P/E ratio of 26.
Most investors will prefer to follow Target shares until operating trends at least stabilize. But the business will recover, and the chain's low valuation is reducing the risk in owning the stock over the long term. Stay tuned for Target's holiday season update for any major shift in its operating outlook that could signal an end to its sales slide ahead in 2024.
