TipRanks Smart Value #16: Value Target
1
Dear Investors,
Dear Investors,
Welcome to the 16th edition of our recently launched TipRanks Smart Value Newsletter!
1
This Week’s Top Value Pick: Target Corp. (TGT)
Target Corp. (TGT) is a leading U.S.-based general merchandise retailer offering a wide range of products, including apparel, home goods, food and beverages, electronics, and essentials. Operating a large network of stores and a growing e-commerce platform across the United States, the company serves millions of guests through a seamless, omnichannel experience. Target combines a curated assortment of national and exclusive private-label brands, focusing on value and convenience.
1
Brand Journey
Target’s roots trace back to 1902, when George Dayton founded Goodfellow Dry Goods in Minneapolis. The company was renamed Dayton Dry Goods Company in 1903 and later became known simply as the Dayton Company in 1911. In 1962, the first Target store opened as a discount retail division of Dayton’s department stores. Reflecting the growing strength and prominence of the Target brand, the parent company, then known as Dayton-Hudson Corp., officially adopted the Target name in 2000.
Over the past two decades, Target has steadily expanded its U.S. footprint, reaching a nationwide presence by 2025 with nearly 2,000 stores. Its merchandise evolved into a curated, multi-category assortment spanning apparel, home goods, food, and essentials, with owned and exclusive brands playing a significant role in driving sales. Strategic partnerships with Apple, Disney, Levi’s, and Ulta Beauty provide several unique offerings.
In 2015, Target streamlined operations by selling its pharmacy and clinic businesses to CVS Health for $1.9 billion, allowing greater focus on core retail while maintaining in-store health services under CVS branding.
In 2017, Target acquired Shipt, a move that significantly accelerated its same-day delivery capabilities and strengthened its omnichannel experience. Since then, Target has transformed its stores into localized fulfillment hubs – now handling over 96% of total merchandise sales, including digitally originated orders. Services such as Order Pickup, Drive Up, and Shipt offer fast, flexible fulfillment, aligning with rising consumer expectations for speed and convenience.
Ongoing investments in technology, supply chain transformation, and loyalty programs have driven efficiency and customer engagement. The company also continues to prioritize store remodeling, new openings, and digital channel enhancements to capture evolving consumer trends and support long-term growth.
Today, Target reports annual sales of $106.6 billion and holds a market capitalization of approximately $44 billion. It ranks #39 on the 2025 Fortune 500 list.!
1
Retail Dynamics
Target operates a U.S.-focused, multi-category retail business, built around selling general merchandise and everyday essentials through both stores and digital channels. The company generates most of its revenue from merchandise sales across six key categories: Apparel & Accessories, Beauty & Household Essentials, Food & Beverage, Hardlines (electronics and furniture), Home Furnishings & Décor, and Other (which includes CVS-run pharmacies and Starbucks cafés). Approximately 33% of sales come from owned and exclusive brands, supporting higher margins and strong customer loyalty. Moreover, TGT’s stores-as-hubs model reduces fulfillment costs, helping preserve healthy margins.
In addition to merchandise sales, Target generates revenue from several complementary sources. Through Roundel, the company provides advertising services to vendors and third parties, helping brands reach Target’s broad customer base. The retailer also earns profit-sharing income from its Target Circle credit cards. Another growing revenue stream comes from Target Plus, its curated third-party marketplace. Additionally, the company’s enhanced loyalty ecosystem – including the Target Circle program and the new Target Circle 360 membership – helps drive deeper customer engagement and encourages repeat shopping.
In Q1 2025, sales were pressured by weak consumer confidence and softer discretionary spending, resulting in an 11% year-over-year increase in inventory. Slower sales triggered higher markdowns and receipt adjustment costs,1 which will largely be recognized in the first half of the year. Inventory rebalancing is expected to be completed by the second half, easing margin pressure and stabilizing gross margins. Shrink – i.e., losses from theft, damage, or errors – reduced gross margin by 120 basis points in Q1. Target reduced the margin impact of shrink by approximately 40 basis points in 2024 and expects to make further progress in 2025.
To mitigate tariff impacts, Target has reduced its sourcing from China to about 30%, down from 60% in 2017, and intends to lower it to below 25% by 2026. The company is expanding sourcing in Southeast Asia and Latin America. TGT is prioritizing affordability through supply chain flexibility, vendor negotiations, and curated assortments including Bullseye’s Playground (TGT’s value-focused section) – to maintain shopper value perception.
For Q2, TGT plans to introduce 10,000 new summer items, including exclusives like Nintendo Switch 2 and a new Champion collection, alongside in-store events to boost foot traffic. The retailer remains confident in its price positioning relative to competitors. The company gained or held share in 15 of 35 tracked categories, including women’s swimwear, toddler apparel, and produce driven by rise in digital sales in Q1.
While discretionary categories remain under pressure, Target’s emphasis on new and exclusive products has driven relative strength in key segments. To further improve execution, Target has established an Enterprise Acceleration Office to fast-track operational agility and technology adoption. Ongoing investments in technology, supply chain, and process improvements are expected to support long-term growth and profitability.
—
1 – Inventory adjustment costs are costs associated with markdowns, clearance, and adjusting inventory receipts (orders) when sales are lower than expected.
1
Target Tenacity
Target has delivered resilient financial performance, supported by its omnichannel retail model, operational efficiency, and disciplined capital management. Over the past five years, revenue and EPS have grown at a CAGR of 5.5% and 11%, respectively, buoyed by pandemic-era gains – although these were followed by a post-pandemic plateau, as shifting consumer behavior and external pressures weighed on more recent earnings.
In Q1 FY25, Target reported net sales of $23.8 billion, down 2.8% year-over-year, missing analysts’ estimates. Comparable sales2 fell 3.8%, driven by a 2.4% drop in traffic and a 1.4% decrease in average transaction ticket. Non-merchandise revenue streams, such as Roundel (retail media) and Target Plus (third-party marketplace), grew at a double-digit pace, helping offset softness in discretionary spending. Adjusted EPS was $1.30, down from $2.03 a year ago and below consensus estimates, as softer sales, tariff costs, and inflation drove operational headwinds.
Gross margin held steady at 28.2%, while narrowing of SG&A expense rate to 19.3%, from 21% in the same period a year back. A $593 million gain from credit card interchange fee litigation boosted operating income 13.6% to $1.5 billion. Operating cash flow declined to $275 million, down from $1.1 billion in the prior-year period, impacted by lower sales and seasonal working capital shifts.
Target maintains a solid balance sheet with $2.9 billion in cash and cash equivalents. Its debt-to-equity ratio of approximately 1.3 is above the retail sector median – a reflection not of distress but of the capital requirements associated with maintaining a nationwide store and logistics network. Despite this, Target maintains a strong credit profile with investment-grade ratings: “A2” from Moody’s and “A” from both S&P and Fitch, all with stable outlooks.
Looking ahead, Target expects low-single-digit sales declines in FY25, with adjusted EPS guidance of $8 at midpoint. The EPS forecast reflects macro headwinds, tariffs, and cautious consumer spending, partially offset by gains from shrink recovery, productivity improvements, and acceleration initiatives. Comparable sales are expected to decline in the low single digits throughout 2025, including the important Q4 holiday period due to ongoing consumer caution, macroeconomic headwinds (like tariffs and inflation), and weak discretionary spending. CapEx is expected near the low end of $4-5 billion. Despite near-term headwinds, Target’s scale, brand strength, and strategic investments leave it well-positioned to navigate the current retail environment and reaccelerate growth when conditions improve.
Target’s reliable stability is further reflected in its return metrics. For the trailing 12 months through Q1, the company posted a return on invested capital (ROIC) of 15.1%, placing it among the top 20% of industry peers – as is its return on assets (ROA). Meanwhile, TGT’s return on equity (ROE) ranks in the top decile of its industry. These metrics highlight the company’s strong margin profile, scale efficiencies, and disciplined reinvestment approach.
2 – Comparable sales (or “same-store sales”) measure sales growth at stores open for at least one year, excluding new or closed locations. It’s a key retail metric for underlying business health.
—
1
Shareholder Value
Target continues to maintain a strong focus on delivering shareholder value, underpinned by solid free cash flow and a disciplined capital allocation strategy. The company boasts a remarkable track record of uninterrupted dividend payments spanning more than 57 years, earning it the coveted status of a Dividend King. Over the past five years, Target’s dividend has grown at a CAGR of 11.2%, underscoring management’s confidence in the company’s long-term earnings potential. Currently, Target returns 55.1% of its adjusted earnings to shareholders through dividends.
In the first quarter of fiscal 2025, Target distributed $510 million in dividends, reflecting an annualized payout of $4.48 per share. The company recently declared a second-quarter dividend of $1.12 per share, a 1.8% increase year over year. Target’s dividend yield now stands at an attractive 4.71% – nearly double the Consumer Staples sector average of 2.47%.
Complementing its dividend program, Target also actively repurchases shares to enhance per-share value. In Q1 FY25, the company allocated $251 million toward share buybacks. At quarter-end, Target had approximately $8.4 billion remaining under its current $15 billion share repurchase authorization, approved by the Board in August 2021. While the company paused repurchases in April due to tariff uncertainties, improving trade conditions may support future buybacks.
Despite these strengths, Target’s stock has faced significant headwinds, declining more than 34% over the past year. The downturn was driven by softer sales and profits in Q1, driven by tariff-related cost pressures, inflation fatigue, and cautious consumer spending. Nevertheless, analysts remain positive on TGT’s outlook, forecasting a 7.1% upside over the next 12 months, with some projecting gains of up to 41%. Analysts cite improving cost efficiencies and strengthening digital sales trends as key drivers that could support margin recovery.
Target’s valuation remains highly attractive – particularly given its scale, market share, and business resilience. The stock trades at 11.7x trailing and 13x forward non-GAAP P/E, representing a sizable discount to the sector median and nearly 30% below its own historical averages. Compared to peers such as Walmart, Costco, and others, TGT’s value proposition stands out even more. Its GAAP and non-GAAP P/E ratios – both forward and trailing – are well below peer averages, a pattern echoed by its EV/EBITDA and price-to-free-cash-flow multiples.
Admittedly, Target’s revenue and EPS growth have lagged those of its peers – but not to a degree that justifies such a wide valuation gap, especially considering its significantly stronger dividend profile. The discount likely reflects the stock’s extended period of range-bound or downward trading over the past two years. Sentiment was initially dented by a consumer backlash tied to a Pride merchandise controversy in May 2023, and further weighed down by a broader rotation toward tech and growth stocks. However, with geopolitical tensions rising and economic softness favoring staples over cyclicals, investors may begin to reengage with this high-quality name. Discounted cash flow analysis supports this view, suggesting the stock is undervalued by roughly 30%.
1
Investing Takeaway
Target remains a fundamentally strong and well-managed retailer, despite recent headwinds from softer sales, tariffs, and shifting consumer behavior. Its evolving omnichannel model, strong brand partnerships, and disciplined cost management position it well for long-term resilience. The company’s consistent focus on shareholder returns – through steady dividends and opportunistic share buybacks – reflects its confidence in underlying earnings power. With the stock trading at a significant discount to both sector peers and its own historical averages, Target offers an attractive value opportunity. For long-term investors, this valuation gap presents a compelling entry point, especially as the company continues to enhance operational agility and drive profitability improvements. As consumer trends stabilize and cost efficiencies take hold, Target’s solid fundamentals and commitment to value delivery could fuel meaningful stock appreciation over time.
