Struggling Stock Fails to Hit the Bullseye. Could This Be the Opportune moment for Budget-conscious Buyers?
Investors in Target (TGT) might find it hard to envision a worse earnings report than the one released for the third quarter of 2025. The stock plummeted by 22% in the subsequent trading session after the company disclosed unsatisfactory results.
Now, the dilemma for investors is whether the pessimism is unwarranted or if Target is a stock that investors should steer clear of. Let's delve deeper.
Target's third-quarter earnings
It's safe to say that Target's recent financials are unlikely to excite most investors. In the third quarter of 2025, revenue stood at around $26 billion, a meager 1% increase compared to the previous year. This included a comparable sales increase of only 0.3%. Despite digital sales soaring by 11% during that period, they failed to compensate for the dismal in-store performance.
During the Q3 2025 earnings call, CEO Brian C. Cornell attributed the modest increase to cautious consumer spending. The lower-than-anticipated sales led to a surge in inventory, with its $15 billion in inventory increasing by more than $3 billion from the previous year's levels.
Unfortunately, for Target, operating expenses climbed by over 3%. The company blamed disruptions from a short-lived port strike, severe weather in the Southeast, and increasing healthcare costs for the additional expenses. These factors resulted in a 12% annual decrease in net earnings, which amounted to $854 million for Q3, or $1.85 per share.
However, the biggest letdown might have been Target's full-year guidance. The company now estimates its 2025 adjusted earnings per share will be around $8.60 per share at the midpoint, significantly lower than the $9.35 per share it projected at the midpoint just one quarter ago.
Moreover, Target's predicament might leave investors wondering where the company will find growth. More than 75% of Americans live within 10 miles of a Target, and with no apparent plans to expand internationally, this raises questions about how Target will drive growth in the long term.
The state of Target stock
Such a performance resulted in Target stock striking new 52-week lows. Consequently, the company has barely managed to achieve a positive total return over the past five years, raising concerns for investors.
However, the current state of Target stock might appeal to growth and income investors.
The high inventory levels and cautious consumer spending are likely cyclical challenges that should improve over time. Moreover, these struggles are likely factored into Target stock. Despite its struggles, the P/E ratio has fallen to around 13, a level close to five-year lows and significantly below the valuation of its largest rivals.
Furthermore, Target's annual dividend of $4.48 per share now offers a return of 3.6%. This is almost three times the dividend yield of the S&P 500, which provides investors with a return of just over 1.2%.
Target is also a Dividend King, having maintained a dividend increase streak of 53 years. While this enhances confidence in the stock, it also means that much of the value of Target stock hinges on these annual payout hikes. Thus, Target is likely to continue this streak, bolstering confidence in the company's consistent, rising income stream.
Investing in Target stock
Although Target appears to be a challenging stock under the current circumstances, the case for buying the company seems surprisingly robust.
Indeed, sales figures are unimpressive, and challenges such as rising inventory and an apparent lack of expansion options are concerning.
Nonetheless, investors should remember that the company remains profitable despite its troubles. Moreover, its 13 P/E ratio likely means that its stock price has more than accounted for the company's current challenges. Furthermore, a 3.6% dividend yield combined with a 53-year streak of payout hikes may be too hard for income investors to ignore.
As business conditions improve, sales and earnings should start to rise again. This should not only boost Target's stock price but also enable it to continue its long streak of dividend increases.
Given Target's current financial situation, investors might be considering adjusting their investing strategy. With the company's P/E ratio at around 13, significantly lower than its rivals, it could be an attractive option for investors seeking value in the finance market. Furthermore, Target's strong dividend history, as a Dividend King with a 53-year streak of payout increases, could also appeal to investors looking for reliable income sources.
