Target (TGT 0.18%) has had its problems over the past couple of years. Management's miscalculation on the types and amounts of some inventory led to heavily discounted sales. Supply chain disruptions didn't help that situation. It also had well-publicized theft issues that led it to actually close several stores.
That all resulted in lower profitability, and investors bailed out of Target stock. Even though the stock has recovered from recent lows and gained nearly 25% in the last six months, it's still down by nearly 10% over the past year. With the business rebounding, the discount retailer looks to still be trading at a discounted share price.
Profits are rebounding
After a sharp rise in sales and earnings during the pandemic era, the previously mentioned pricing and profit margin issues resulted in a big drop in earnings in 2022.
Data Source: Statista
But 2023 looked much better. Net earnings just through the first nine months of last year nearly met the prior year's total. In its third-quarter report, the company noted that inventories had dropped 14% year over year. Earnings per share jumped 36% in the third quarter versus the prior-year period.
The inventory correction allowed Target to introduce more than 10,000 new items for the holiday shopping season. In January, it added another large group of new products focused on the popular health and wellness category.
When it reported its third-quarter results, Target management projected that fourth-quarter earnings would be similar to the third quarter. That would mean that Target's 2023 net income surpassed pre-pandemic levels. The company is expected to report fourth-quarter and full-year 2023 results on March 5.
Even if Target doesn't beat estimates, investors will realize that its business has recovered and the turnaround is well underway. That could be the catalyst for the stock to continue its recent move higher. Investors would be wise to own the stock as the recovery in Target's underlying business has clearly arrived.
