Target (TGT) Battens Down the Hatches as Tough Stretch Continues

Target (TGT) is feeling the heat as consumer discretionary stocks come under intense pressure. Shoppers tightening their wallets are flocking to giants like Walmart (WMT) and Costco (COST), where essentials dominate the shelves. Meanwhile, Target’s heavy reliance on non-essential items leaves it exposed and struggling to keep pace in this shifting retail battleground.

Recent results paint a challenging picture: revenue is declining year-over-year, earnings have fallen short of expectations, and comparable sales are dropping sharply. The company’s 2025 guidance remains broad and cautious, reflecting uncertainty about the months ahead. Yet, despite these headwinds, Target’s ability to create value over the past twelve months has remained resilient.

There are no clear signs of fundamental weakness in the investment thesis, and the business appears well-positioned to weather cyclical downturns like the current one. Additionally, the stock is trading near its lowest valuation in a decade—a strong indication of prevailing market pessimism.

While the near-term environment is clearly difficult for Target, long-term investors may see this as an attractive opportunity to initiate or increase exposure. With a solid history of consistent value creation, the company is likely to rebound as macro conditions improve. For these reasons, despite recent softness, I maintain a Buy rating on Target—viewing current levels as a potentially smart entry point for patient investors.

Numbers Struggle to Add Up for TGT

Q1 2025 was rough for Target. The company missed revenue estimates, reported weak comparable sales, and experienced another drop in in-store traffic. The only solid headline figure was GAAP EPS at $2.27—but that came with a major asterisk. This number included a nearly $600 million one-time legal settlement. Excluding that non-recurring gain, earnings were closer to $1.30 per share, representing a 36% decline from $2.03 in the same period last year and falling well short of the $1.65 expected by analysts.

Comparable sales declined 3.8% year-over-year, with in-store comps plunging 5.7%. Although digital sales grew by 4.7%, this increase was insufficient to offset the drop in physical store traffic, a notable red flag. In today’s retail landscape, slowing foot traffic is common, but digital growth is expected to compensate. When it doesn’t, it signals a contracting business, which was evident this quarter.

Looking ahead, the company’s guidance did little to alleviate concerns. Management forecasts a low single-digit decline in full-year sales and adjusted EPS ranging from $7 to $9, a wide span that underscores significant uncertainty for the remainder of 2025.

While challenging macro conditions affect the entire sector, competitors like Costco and Walmart have demonstrated more substantial pricing power and more precise strategic direction. The market dislikes uncertainty, and Target’s outlook offered little reassurance about the challenges that the year might bring.

Why Target’s Capital Game Isn’t Losing Steam

Regardless of how any single quarter plays out, one of the best ways to evaluate a retailer like Target is by looking at how efficiently it generates returns in a capital-intensive business.

Taking a seasonally adjusted, trailing twelve-month view, Target’s return on invested capital (ROIC)—calculated using invested capital that includes long-term debt (both current and non-current), shareholder equity, and operating lease liabilities, minus cash and equivalents—offers a more traditional lens for assessing value creation.

For the trailing twelve months ended May 3, this year, Target had an average invested capital of $30.75 billion. Dividing that by its net operating profit after taxes (NOPAT) of $4.63 billion results in an ROIC of 15.1%. That’s a solid number, especially for a retailer in a low-margin, highly competitive industry. Still, it’s slightly below the 15.4% reported for the same period last year.

To evaluate whether this return creates value, it’s essential to compare it to the company’s weighted average cost of capital (WACC). And in Target’s case, the gap is significant. Based on a cost of equity of 7.8%, a 10-year Treasury yield of 4.4%, and a beta of 0.8, a conservative estimate for Target’s WACC comes in around 7%. That implies an 8% spread between ROIC and WACC—strong evidence of durable competitive advantages, solid operational efficiency, and smart capital allocation.

So, even though recent earnings reflect some near-term softness, the high ROIC, just marginally down from last year, shows that Target’s core fundamentals remain intact. The company may be guiding for modest revenue declines, but its ability to create long-term value hasn’t really changed so far.

Target’s Price Tag Hits Basement Level

As bearishness continues to build around the investment case, Target’s valuation multiples have recently dropped to their lowest levels in the past decade. Its forward P/E ratio fell to 12x in early April and, while it has recovered slightly, it still sits at a depressed 13.2x. The stock was last traded at this low price in 2020, immediately after the lockdowns, and again in October 2023. For the most part, this remains one of the weakest valuations Target has seen over the past decade.

Moreover, when Target was trading at similarly depressed multiples nearly two years ago, hitting a low of approximately $105 per share, it was reporting an annual ROIC of just 12.3%, meaningfully below current levels.

That doesn’t automatically mean the stock is undervalued today, especially since these multiples are based on forward-looking estimates. But it’s reasonable to argue that the company’s fundamentals are stronger now—or at the very least, not weaker—than they were two years ago, yet the stock is priced as if they are.

Is Target a Buy, Sell, or Hold?

Despite skepticism prevailing, Target stock maintains a Moderate Buy rating, supported by a consensus of 34 Wall Street analysts. Among them, 11 are bullish, 21 are neutral, and only 2 are bearish. Although many analysts lowered their price targets following Q1 results, TGT’s average stock price target remains optimistic at $105.79, approximately 11.5% above the current share price.

See more TGT analyst ratings

Target Might Be Down, But It’s Not Out

Target’s near-term outlook remains muted following a disappointing quarter that heightened uncertainty around the potential impact of ongoing consumer spending challenges. However, thanks to its strong history of value creation, the company still has a reasonable buffer before returns fall below its cost of capital. Importantly, there are no clear signs of structural issues at this time—current challenges appear largely cyclical.

Given the stock’s historically low valuation, the long-term investment case still points toward potential alpha generation, even as short-term volatility persists throughout the year.