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Did you know retail chain Target (NYSE: TGT) is a Dividend King? That's right -- it has raised its dividend annually for the past 53 years, putting it in an elite group of dividend stocks that are reliable for passive income under almost any circumstances.
Now is an excellent time to test that, considering that Target has been in the doldrums lately. Target stock is up 2.5% over the past year, trailing the S&P 500, which is up 27%. Can Target turn around this year? Let's check it out.
What's going wrong at Target?
Target is a discount retailer, but unlike its competitors in this space, it hasn't managed well through inflation. Investors have lost confidence because of its disappointing performance, but that could all be external headwinds. What makes Target's prospects look bleak right now is that its competitors are doing much better, which could imply that there are internal problems at Target.
You can talk about supply chain issues, inventory management, and a weak consumer. But it looks like the average consumer isn't finding value at Target right now. Target has always been the "upscale" discounter, but it may be losing that customer to Costco Wholesale, whose annual fees attract a certain type of customer that's willing to pay for it, and it may be losing value-conscious customers to Walmart.
Customers are still coming in. Traffic was up 3% in the holiday season, specifically November and December 2024, which Target gave an update about last week. Comparable sales (comps) were only 2%, suggesting that even customers who are buying aren't buying as much, or they're switching to cheaper goods. But it's a nice uptick from the fiscal third quarter (ended Nov. 2), when comps were up a meager 0.03%, and it beat expectations.
Can it bounce back this year?
Although the implication is that there's trouble at Target, much of the softness could be attributed to the core Target merchandise model. It sells a lot of discretionary merchandise, particularly for the home, where customers just aren't spending today. In comparison, Walmart and Costco have a stronger focus on grocery. So Target may not be able to make a strong turnaround until the economy improves.
If customers are coming in but switching down to cheaper products, Target could boost transactions, and sales, in the near term by discounting, again. It did that a few years ago when high inflation first hit and Target had to right its inventory, dragging down profits and creating a pessimistic outlook for investors. That will also lead to a further contraction in its operating margin, which plunged when it started discounting in 2022 and has finally been making progress.