Shares of Target(NYSE: TGT) have struggled this year, dropping by nearly 30% through the week ending May 9. A confluence of factors contributed to that decline, some of which were macroeconomic and others that were of the retail giant's own making.
The lingering impacts of high inflation curbed consumer demand, contributing to the 0.8% revenue decline to $106.6 billion that Target experienced in its fiscal 2024 (which ended Feb. 1). President Donald Trump's tariff policies are injecting further economic uncertainty into the situation.
Not only that, Target alienated many shoppers by ending its longstanding diversity, equity, and inclusion (DEI) policies in January. Media reports indicate that the decision has led to a notable decline in foot traffic in its stores this year as consumers have boycotted the chain in response.
These factors have put downward pressure on Target's stock price, but the sell-off presents a buying opportunity for investors who are focused on the long run. Several factors suggest the company is positioned for prosperous years ahead. Here's a look at three of them.
Image source: Getty Images.
Target's growth opportunities
Target can't control macroeconomic factors, but its approach to DEI is another story. Recognizing the impact of its January decision, Target CEO Brian Cornell met in April with civil rights leaders, and committed to fulfilling the company's 2020 promise to invest $2 billion into Black businesses by the end of July. If management can repair the damage it inflicted on its brand through its decision to retreat from its DEI policies, Target has a chance to rebound. Following that meeting, however, a key participant described it as a good start, but also said that he was calling for the boycotts to continue.
In addition, the company is working to grow sales through e-commerce. Target's digital income is steadily increasing. In its fiscal 2024, digital sales comprised 20% of revenue, up from 18% in the prior year.
Although macroeconomic headwinds loom in the near term, over the long run, projections forecast that U.S. e-commerce sales will expand from $1.3 trillion this year to $1.8 trillion by 2029. That bodes well for Target's online shopping business.
Also, more than a third of its customers use the Target mobile app while in its stores, and these consumers spend, on average, 50% more per transaction than those who don't, according to the company. This illustrates how the digital and store experiences are complementing each other.
Speaking of stores, they remain Target's bread and butter -- and the retailer plans to add 300 locations over the next decade.
A powerful ecosystem
Today's Target is more than just a brick-and-mortar destination. The company has constructed a complex ecosystem designed to strengthen customer affinity and drive more frequent purchases.
One piece of this ecosystem involves the company's free loyalty program, Target Circle. Customers who sign up for it receive discounts and other incentives to shop at Target. The program acquired 13 million new members in 2024 -- and on average, its loyalty members spend 3 times more than nonmembers.
The loyalty program produces data used by another component of Target's ecosystem: Roundel, the retailer's in-house digital advertising business. Roundel employs artificial intelligence to analyze Target Circle data and deliver advertising tailored specifically for each consumer.
Target doesn't divulge Roundel's revenue, but it noted this business produced "nearly $2 billion in value last year." Because of Roundel's success to date, Target expects to double the ad agency's size over the next five years.
Roundel operates in an area of the digital advertising sector called retail media. The revenue opportunities here are substantial. Amazon generated $14 billion in digital ad sales. Industry forecasts estimate the U.S. retail media market will expand from $52 billion in 2024 to $98 billion by 2028, providing a tailwind to Roundel.
The stock's valuation is attractive
One final reason to scoop up Target stock is that it's a bargain right now. A look at its price-to-earnings (P/E) ratio is revealing. This metric is a frequently used means of assessing stock valuation, as it tells you how much investors are willing to pay for a dollar's worth of a company's recent earnings.
Compared to competitors Walmart and Amazon, Target's P/E multiple is significantly lower at the time of this writing, suggesting Target shares are a better value than its rivals.
Those who pick up Target shares now not only get the stock at an attractive valuation, they'll also get to collect an appealing passive income stream while waiting for the share price to recover. That's because the company pays a dividend -- and has reliably since 1967. And at the current share price, that dividend has a yield of around 4.5%, more than triple the S&P 500's average.
Target is going through a rough patch right now. But over the long haul, online sales growth, an expanding store footprint, an ecosystem that promotes consumer loyalty, and an expanding advertising business are factors that can propel its business forward. Those things, combined with a compelling stock valuation, make Target stock a worthwhile long-term investment.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Robert Izquierdo has positions in Amazon, Target, and Walmart. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.
