To The Moon

$Target(TGT)$

Target Corporation’s latest earnings release was met with a sharp market reaction. Shares fell nearly 7–8% following the announcement, reflecting both weaker-than-expected results and the news that CEO Brian Cornell will step down, to be replaced by another internal executive.

For a company often regarded as a steady, middle-market retail anchor, Target continues to deliver more intrigue than its reputation suggests. Once considered one of America’s most consistent big-box retailers, Target now faces existential questions about growth, capital allocation, and whether its role as a barometer of the middle class leaves it too exposed to shifting consumer behavior.

A History of Mixed Calls and Investor Skepticism

Target is no stranger to volatility, despite its reputation for stability. My own coverage dates back to 2018, when I argued that TJX offered superior long-term returns compared to Target. That call was made before Target’s pandemic-era boom, when management was lauded for swiftly pivoting to online sales, curbside pickup, and same-day delivery.

By late 2019, however, my valuation analysis led to a sell recommendation. At the time, Target was trading at nearly 20x earnings, a premium multiple that seemed unsustainable given the company’s modest 3–4% real earnings growth trajectory. Importantly, this call came well before the internet-driven controversies that would later engulf the company.

In 2022, as the post-pandemic earnings spike began to normalize, I used Target as a case study of the retail boom-and-bust cycle. Stimulus checks and stay-at-home spending temporarily inflated sales, but much of that strength proved transitory. As consumers shifted back toward services and discretionary spending slowed, Target’s fundamentals reverted to their pre-pandemic trajectory: sluggish growth at best.

The Growth Problem: Slowing Revenues and Weak Margins

The heart of Target’s problem today lies in growth. On a cumulative three-year basis, revenue is now down 2.6%. Adjusted for inflation, the decline is far more severe—likely in the 12–14% range.

Historically, a retailer of Target’s scale should be able to grow at least modestly above inflation to sustain long-term shareholder returns. Yet Target is falling short of even this basic threshold.

• Pre-pandemic growth (2006–2019): Earnings grew at just 3–4% annually, barely exceeding inflation in a low-rate environment.

• Buybacks masked weakness: Adjusted for aggressive share repurchases, true earnings growth was closer to 1.5% annually. Target bought back nearly a quarter of its shares over the past decade—mostly at elevated valuations—which destroyed shareholder value.

• Post-pandemic normalization: After stimulus-fueled record highs in 2020–21, both revenue and margins have declined. Target has been unable to sustain momentum in higher-margin discretionary categories.

This deterioration has left Target with one of the weakest growth profiles among large-cap U.S. retailers. For context, Dollar General has grown earnings nearly fivefold since 2010, while Target’s earnings per share over the same period are essentially flat after adjusting for inflation.

The CEO Transition: A Pivotal Moment

The announcement of CEO Brian Cornell’s departure underscores Target’s strategic crossroads. While Cornell deserves credit for steering the company through the pandemic with operational agility, his record on capital allocation is more mixed. The decision to authorize large-scale buybacks at inflated valuations has proven destructive.

Moreover, Target’s product mix—heavily skewed toward discretionary categories such as apparel and home goods—has left it vulnerable to shifts in consumer spending. Competitors with stronger discount positioning (Dollar Tree, Dollar General, Walmart) have been gaining share, especially as inflation erodes real disposable income.

The incoming leadership will need to confront several challenges head-on:

1. Re-establishing growth in a mature, low-margin business.

2. Improving capital discipline, particularly in buybacks and reinvestment strategy.

3. Adapting to a structurally strained middle class, where “trading down” behavior is increasingly common.

Target as a Middle-Class Economic Barometer

One of the reasons Target is so interesting is that it effectively mirrors the financial health of America’s middle class. Its price positioning sits above Walmart’s budget-oriented model but below high-end department stores.

• When the middle class is thriving, Target benefits from “affordable premium” spending.

• When the middle class struggles, consumers migrate toward discounters and dollar stores.

This dynamic is now playing out in real time. Dollar General and Walmart have seen relatively stronger performance as consumers seek value. Meanwhile, Target’s discretionary-heavy mix has weighed heavily on results.

Historically, Target’s strongest period of growth was from the 1970s through the early 2000s, peaking just before the Great Recession. Since then, growth has steadily slowed. In the decade preceding COVID-19, Target returned just 4% annually to shareholders—a figure that barely outpaced inflation and fell far short of the broader S&P 500.

Valuation: Still Not Compelling

Even after the post-earnings selloff, Target does not appear attractively priced. At around 18x forward earnings and with real earnings growth of 1–2% annually, the PEG ratio remains deeply unattractive.

• Earnings outlook: 2024 EPS is projected at roughly $7.25, only modestly above the pre-pandemic 2019 EPS of $6.39—despite nearly 20% cumulative inflation since then.

• DCF sensitivity: Assuming a 2% long-term growth rate and an 8% discount rate, fair value for Target would fall in the $65–75 range. Even under a more optimistic 4% growth assumption, fair value only rises to the mid-$90s—still below current trading levels.

• Dividend: At roughly 3%, the dividend yield is respectable but not sufficient to offset weak growth prospects.

In other words, the stock would need to fall significantly before offering an attractive risk/reward entry point.

Investment Takeaways

Target is emblematic of a mature U.S. retailer facing structural headwinds. Despite periods of strength, the long-term growth picture is increasingly uninspiring.

Key points for investors:

1. Revenue deterioration is real. The three-year revenue trend is negative, and inflation-adjusted performance is worse.

2. Capital allocation has been poor. Aggressive buybacks at elevated valuations destroyed value.

3. Target’s middle-class positioning is vulnerable. Consumers continue to “trade down” to dollar stores and Walmart, eroding Target’s market share.

4. Valuation is not compelling. Even after a sharp selloff, the stock remains overvalued on a PEG and DCF basis.

5. Dividend is steady but insufficient. At 3%, the dividend yield does not compensate for lackluster growth.

Verdict: Avoid for Now

Target’s recent decline may tempt some contrarian investors, but the stock still does not meet basic quality or valuation thresholds. Long-term earnings growth has slowed to below-inflation levels, and the CEO transition underscores the company’s uncertain strategic direction.

For investors seeking retail exposure, alternatives such as Dollar General or even Walmart offer stronger fundamentals, more resilient business models, and clearer long-term growth trajectories.

Entry Zone: For Target to merit serious consideration, shares would likely need to trade closer to $65–75, a range that better reflects its modest growth outlook and valuation risk. Until then, Target remains a “sell” or at best a “hold” for income-oriented investors who prize the dividend but can tolerate minimal growth.