Down 30% in 2025, Is This Dividend King a No-Brainer Stock to Buy Now?

Globe and Mail

28-05-2025

Target(NYSE: TGT) is down 30.2% year-to-date at the time of this writing. The sell-off is brutal, considering shares of the retail giant fell 9.3% between the start of 2023 and the end of 2024 -- a two-year period in which the S&P 500(SNPINDEX: ^GSPC) gained 53.2%.
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But value investors looking at Target's 53 consecutive years of dividend raises and 4.7% yield may be wondering if the Dividend King stock is worth buying on the dip.
Let's dive into Target's latest earnings report to see if management has a clear direction for turning the company around and if Target stock is worth buying now.
Target's results continue to be unimpressive
Target's latest earnings (first-quarter fiscal 2025) weren't great. But its full-year forecast is an even bigger concern, as adjusted earnings per share (EPS) are expected to be just $7 to $9. Unless results come in at the high end of that range, Target will likely notch yet another year of negative earnings and net sales growth.
Target's weak results mainly stem from low foot traffic and inventory mismanagement. One of the greatest challenges for retailers is predicting buyer behavior trends. It's hard enough to know what products customers will buy, but it's even more difficult to forecast how much they will want. Over-ordering sets the stage for discounts and lower profitability, whereas under-ordering can leave sales on the table.
Since 96% of Target's net sales volume is fulfilled by its stores, Target has to manage inventory levels to account for in-store purchases and online orders. Digital sales have been a bright spot for Target, with comparable digital sales up 4.7% and average click-to-deliver speeds nearly 20% faster than last year. More than 70% of all first-quarter digital orders were fulfilled within one day. These numbers sound great on paper, but supporting a growing digital sales funnel comes with costs and pressures on inventory management.
In its latest quarter, inventory jumped 11% compared to first-quarter fiscal 2024 due to lower-than-expected sales -- which directly impacted Target's bottom line.
Target's plan to turn the corner
On its first-quarter fiscal 2025 earnings call. Target shared strategies for turning the business around, including offering more than 10,000 new items starting at just $1, leaning into holiday seasons (which have historically been Target's bread and butter), and the formation of a new enterprise called Acceleration Office. Acceleration Office will focus on enabling technology, artificial intelligence, and other tools to make Target more efficient, cost-effective, and agile. A key part of the project is modernizing and streamlining inventory management, which could help Target save a significant amount of money and better forecast buyer behavior trends. It sounds great on paper, but investors have heard bold plans from Target in the past that didn't translate to bottom-line results.
On Target's fourth-quarter fiscal 2024 earnings call from March, Target said it would tap into the experience side of the business to boost foot traffic and restore consumer interest. The plan was to harken back to the "Tarzhay" spirit -- a somewhat silly term used to add fun and flair to an otherwise routine shopping experience. Target recognizes that the experience side of its business is paramount for driving growth. Target had a great deal of success with e-commerce and curbside pickup during the pandemic. But post-pandemic, Target has struggled to keep pace with peers like Walmart(NYSE: WMT) and Amazon, which can beat Target on price.
Buying goods online expedites the sales process, but it also takes out factors like in-store experiences. In other words, it plays to Walmart's strengths in value, supply chain, and inventory management and less to Target's strengths in getting buyers in the door and having an enjoyable shopping experience. Factors such as inflation and economic uncertainty have impacted buyer behavior. Cost-conscious buyers may be less enthusiastic about the in-store shopping experience and more focused on value.
So, while Target's Acceleration Office and other efforts could lead to improvements over time, it would be a mistake to assume that Target has what it takes to turn the corner anytime soon. The company continues to experience negative growth and relies on the in-store experience during a time when price is paramount.
The bar is low for Target
Target's guidance and management commentary on the earnings call suggests that Target's turnaround will take time, and its results could remain pressured over at least the short term. When a company comes right out and admits results are bad and not getting better anytime soon, it can pummel a stock price. But ripping off the proverbial bandage also resets expectations.
In this case, Target has set the bar really low. And the valuation reflects that, as Target's stock price of just $94.29 per share and $7 to $9 in adjusted fiscal 2025 EPS suggest a price-to-earnings (P/E) ratio based on that guidance range of 10.5 to 13.5. That's dirt cheap for a reliable dividend stock like Target. For context, Walmart has a forward P/E ratio of 36.9.
There are several paths to getting Target back on track, from better cost and inventory management to growing the online business, getting customers shopping in-store through successful partnerships and promotions, and expanding the Target Circle loyalty program. Investors shouldn't expect Target to make progress on all these efforts at once, and new challenges could always emerge that throw a wrench in Target's turnaround. But at least investors know what is not going well with the company and what needs to change.
In sum, Target is an excellent buy for value investors looking to generate passive income and willing to ride out what will likely be a prolonged, volatile period. However, some investors may prefer to wait for Target to show measurable progress on its turnaround before buying the stock.
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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. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.