The stock market's bull run from late 2020 into 2021 brought many stocks to their most recent highs. The bear market that followed pulled many stocks down so far that they have yet to return to those late-2021 peaks. Popular retailer Target (TGT 0.18%) is one of the companies that went on this wild ride over the last few years.
For Target, the stock's run-up to its high water mark was driven by the pandemic. In the early months, everyone needed to shop online and have items delivered or available as curbside pickup, eliminating the need to go into stores when many were closed or had limited occupancy restrictions.
The stock's fall was partly due to the overall market's decline in 2022, but it was also due to some missteps by management. Target shares currently trade 37% below their 2021 high. At its low water mark, the stock was down 61%. Let's see if the recent recovery is an indication that Target stock is a buy right now.
Target's fall from grace
The trouble for Target started in early 2022, when significant inventory challenges drove its weak first-quarter 2022 results. In its effort to adapt to rapidly changing consumer demand during the pandemic, Target's management mismanaged its inventory, leaving the company with too many large and bulky items that needed to be discounted to sell.
This negatively affected gross margin, which dropped more than four percentage points to 25.7%, while operating income fell 43% compared to the year-ago quarter. The news in the following quarter wasn't much better. Second-quarter 2022 saw inventories grow 36% year over year, while gross margin fell to 21.5% and operating income decreased by 87%.
Q2 2022 ended up being the low point for gross margin and operating income, with each metric improving over the ensuing quarters. Inventory levels kept rising for a few more quarters, but then started to trend back down. Despite the improvement over the remainder of 2022 and into 2023, Target's stock price continued to fall.
Brighter skies ahead
While business performance has improved over the last several quarters, the most recently reported quarter was the strongest indicator yet that Target is back on track. On the top line, the company posted revenue growth of 2%, the first quarter of year-over-year growth since Q1 2023. More impressive was the improvement further down the income statement. In fourth-quarter 2023, gross margin improved by nearly 3%, operating income grew by 61%, and earnings per share (EPS) came in at $2.98, good for an increase of 58%.
These improved business metrics are important, but the company also announced a new initiative that could help put Target on equal footing with some of its biggest competitors. Since starting its free membership program a decade ago, Target Circle has grown to over 100 million members. Now that the company has fully integrated its acquisition of Shipt, Target is starting a new paid membership program called Circle 360.
Meant to compete with Amazon's Prime membership and Walmart's Walmart Plus program, Target's Circle 360 will feature same-day delivery, free two-day shipping, and a more generous return policy. This could have a meaningful effect and potentially drive a return to more impressive revenue growth. In 2023, members of the current Target Circle program visited Target five times more frequently and spent five times more than shoppers who were not members. Additional features could entice new members, but also drive even more spending from current members.
Why is Target a buy right now?
On the company's Q4 2023 earnings call, management spoke of Target being well-known for shoppers coming into the store looking for a few items and leaving with extra purchases they didn't anticipate. And now that the company has its inventory struggles straightened out, there seems to be a lot of upside potential.
With its shares trading for 19 times earnings, Target is relatively cheap compared to Walmart, which trades for 32 times earnings. It remains to be seen whether the Circle 360 paid membership is as much of a driver as management expects, but the stock's valuation and the stabilization of the business make shares look attractive to me right now.
