Big-Box Retailers Aren't The Only Ones That Use Target Stock

Target TGT -0.92% 's lukewarm fourth-quarter results stood out among a lackluster retail earnings season, as the company's lukewarm results were enough to make it a relative standout amid its lackluster fourth-quarter results. It must be said, however, that despite the uncertain outlook for the industry, there were some genuinely encouraging signs coming from the big-box retailer.

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On Tuesday, Target (trading under the ticker symbol TGT) provided only a modest outlook for fiscal 2023 that fell short of consensus estimates, echoing more cautious comments coming from rivals, such as Walmart WMT -0.36% (WMT), as consumers continue to struggle with higher prices across the board. Although, given the headwinds that buffeted the retail industry, it could have been worse. During Target's quarterly earnings report, both its profit and revenue forecasts were upbeat, while the company's same-store sales continued to grow in spite of analysts' predictions that they would decline.

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The Smead Capital Management CEO Cole Smead stated that the company had another strong quarter, where it continued to have a sticky consumer, which led to more sales. “The return on equity is over 30%, even in a tough year like 2022, as consumers were more dynamic than expected.” The company also has a higher percentage of higher-income shoppers who have spent more freely despite the higher prices.

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With so much focus and concern surrounding Target's promotion-driven margin declines in the wake of the pandemic, it is also a victory that they were able to provide a blueprint of how they would be able to return to and eventually surpass-pre-pandemic operating margin levels of 6% by fiscal 2024. A lot of analysts are focusing on margin recovery at this time, “given the large number of cost pressures that negatively impacted fiscal-2022 results,” writes Raymond James analyst Bobby Griffin in a research note. Griffin reiterated his Strong Buy rating at $185 per share and a price target of $180.

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It is undeniable that after a brutal 2022, Target's long-term goals look a bit more modest now. It is hard to believe that after leaping from strength to strength during the pandemic, it was caught off guard by consumers' tightening budgets at a time when the supply-chain fallout left stores with too much merchandise on their shelves as a result of consumers' tightening budgets.

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Despite Target's blunder, investors took cold comfort in knowing that it was not alone and is still resolving those issues today.

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As a senior portfolio manager for Miramar Capital, Max Wasserman argues that Target is making progress in getting inventory under control and that after a “choppy quarter or two,” it could be setting itself up for an unexpected holiday season while the company deals with short-term margin pressures. Certainly, the company’s dominant market position and a more than long-term record of success have helped investors remain optimistic that the company can bounce back in the future.

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The stock Target has been one of the best-performing retail stocks over the past few years, its shares rising 9.4% in 2023 to $166, outpacing the broad market by a wide margin. Through Thursday's close, they have gained 0.8%, compared with 1.5% growth in the S&P 500 index SPX +0.41% since Barron's recommended them in September. This quarter's performance, coupled with a prudently conservative outlook for next year, indicates that many of the factors that fueled this year's outperformance are likely to continue in the future.

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There is no doubt that 2023 will be a bounce-back year for Target, according to D.A. Wedbush analyst Michael Baker, who has set a price target of $200 for the stock, reflecting his belief that Target will “show among the best profit and earnings-per-share growth of any big-box retailer in 2023.”