Is Target Stock a Buy on the Dip After Disappointing Earnings?

Target (TGT) stock tumbled Wednesday after the discount retailer once again missed Wall Street's quarterly earnings estimate and warned that a key sales metric will decline during the critical holiday selling season.

Even more troubling for investors in Target stock is that the chain has problems that are company-specific.

For example, fellow discount retailer Walmart (WMT) wowed investors on Tuesday after it reported better-than-expected quarterly results, raised its outlook and announced a new $20 billion share repurchase program.

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Walmart's trifecta of good financial news threw Target's dismal performance into stark enough relief. Making matters worse, we also learned on Wednesday that U.S. retail sales for October jumped 1.3%. Not only did that top economists' estimate for a gain of 1.2%, but it represented the biggest increase in retail sales in eight months.

Better-than-expected quarterly results elsewhere in the retail sector also made Target's poor showing stand out. Offprice retailer TJX (TJX) beat the Street's profit forecast on Wednesday, as did home improvement chain Lowe's (LOW). Home improvement rival Home Depot (HD) reported better-than-expected quarterly results on Tuesday. 

Compounding matters was the fact that Target has now missed analysts' earnings per share (EPS) forecasts for three consecutive quarters. 

Target Stock Reels on Missed EPS 

For the three months ended Sept. 30, Target posted adjusted EPS of $1.54, well short of the Street's forecast for adjusted EPS of $2.18, according to data from S&P Global Market Intelligence. True, revenue of $26.5 billion managed to exceed the Street's estimate for $26.4 billion in sales, but any relief was negated by the company's disappointing same-store sales forecast.

In a blow to Target's stock price (it gapped down almost 17% at the opening bell), management warned that same-store sales are projected to decline in the ongoing fourth quarter. Same-store sales, which typically measure sales at stores open at least a year, are a critical retail industry metric that shows how well a company is growing revenue at its existing store base.

And, by extension, its margins.

Target blamed the sluggish same-store sales on markdowns and more cautious consumers. 

"In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests' shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty," Chief Executive Brian Cornell said in a statement. "This resulted in a third-quarter profit performance well below our expectations."

Target reported strength in categories such as beauty, food and beverage, and household essentials, but continued softness in discretionary categories weighed on the bottom line. And while Target made progress on clearing out an inventory glut that built up during the first half of the year, its merchandise mix is still somewhat of a liability, analysts say.

"Clearly, TGT is struggling more than WMT due to its greater mix of discretionary goods, apart from beauty products, which was up in the mid-teens," writes CFRA Research analyst Arun Sundaram, who rates the stock at Hold.

Wall Street Calls Target Stock a Buy, but…

Analysts as a group, however, remain bullish on the name. Target stock has now lost a third of its value so far in 2022, and that has much of the Street calling shares a bargain. 

Of the 32 analysts covering TGT stock tracked by S&P Global Market Intelligence, 15 rate it at Strong Buy, seven say Buy and 10 call it a Hold. That works out to a consensus recommendation of Buy, with high conviction.

Meanwhile, the Street's average target price of $190.44 gives Target stock implied upside of about 23% in the next 12 months or so. Add in the 2.4% yield on the dividend, and TGT stock's implied total return tops 25%.

Plenty of analysts regard Target stock as a buy-on-the-dip candidate, but it's understandable if its three straight quarters of earnings misses and a downbeat holiday forecast give would-be investors pause.

Patient investors could very well be rewarded for committing fresh capital to Target stock at current levels. On the other hand, what's the rush? Patient investors would probably do just as well to wait and see how Target's current quarter (or two) plays out.