Target Stock Just Lost Over 20%. What Can We Expect From the Stock Going Forward?

I'm a big fan of Target (NYSE: TGT), but it's hard to ignore the pain that was the company's third-quarter results. The retailer reduced its forecast for the year, saw weak traffic even after reducing prices on a lot of items, and faces a challenged consumer base that isn't as inclined to spend on discretionary items the way it was in the past.

The result? Shares fell over 20% last week.

Earnings

Target reported earnings that came in well below expectations. The company reported Q3 earnings of $1.35 per share compared to expectations of $2.30, while revenues were a little under estimates of $25.90 billion.

The quarter in and of itself isn't the only thing that shook investors, as there were costs associated with a port strike, but the company's lowered Q4 guidance is cause for concern. In their Q3 press release, Target's management noted that they anticipate flat comp-store sales in Q4, which would give the company a full-year range of $8.30 to $8.90 per share under generally accepted accounting principles (GAAP). That guidance would fall short of 2023's GAAP earnings of $8.94 per share.

A mixed lineup

One of the big challenges for Target right now is the division of its products. According to CNBC, more than half of the retailer's products are discretionary, giving the company a disadvantage relative to rivals like Walmart (NYSE: WMT), which is heavily focused on things like groceries. The contrast can be seen in the fact that Walmart's most recent quarter was solid.

The other attribute here is price. In Target's results, the company noted that it will have dropped prices on 10,000 items by the end of the year. When you're competing in a world where the consumer has become more scrupulous around spending, pricing pressure is going to happen. But it also impacts the potential of one's bottom line.

The company cut a lot of prices prior to the beginning of the holiday season but only reported a slight increase in foot traffic, indicating that pricing changes might not be effective in alleviating the pain that Target displayed last week.

Valuation

Now expecting adjusted full-year earnings of $8.30 to $8.90 per share, Target is trading at 14.77 times earnings on a price-to-earnings (P/E) ratio based on the high end of that guidance. That's below its five-year average of 19.27, but with expectations for a flat holiday season and finish to the year, the discounted price seems justified.

Going off of analyst estimates for the future, the general average consensus seems to be for earnings of $8.65 per share in 2025 with high-end estimates calling for earnings of $9.58. Conservatively, that doesn't offer a ton of upside from 2024 expectations. On the higher end, it would have shares trading at 13.6 times 2025 estimates. Again, this is lower than the five-year average, but Target would truly have to knock it out of the park and hit the top end of its guidance.

An unclear path

Again, I'm a fan of Target, and five years ago I was all about Target shares. I rated them a buy, and 2021 investors were rewarded with a strong run by the stock. But that momentum didn't last. Overall, this might be a stock to avoid for the time being as the holiday quarter represents a very important time for retailers, and tepid forecasting doesn't provide much momentum for the stock. I'm all about value, but one doesn't want to get caught in the pesky "value trap."

For long-term-oriented investors, this is a stock that has delivered less than 5% over the last five years. In my view, Target needs to become less involved in discretionary products and more involved in essentials. The stock is not necessarily something you want to own right now.