A Major Retailer is Pulling off a Quiet Turnaround

The 2024 holiday season defied economic headwinds, with U.S. retail sales climbing 3.8% year-over-year to a record $994.1 billion.

Major retailers like Walmart (WMT) and Costco (COST) capitalized on this surge, reporting significant sales increases and stock gains. Walmart’s stock reached an all-time high, powered by a strong performance in the grocery sector.

Yet, one major retailer did not share in this rally.

Despite the robust retail environment, Target (NYSE: TGT) has remained an outlier.

Target’s stock remains nearly 50% below its 2021 highs and has fallen ~10% over the past six months. This sluggish performance presents a curious anomaly in an otherwise strong retail sector.

Target’s Big Opportunity

While mainstream narratives have focused on inflationary pressures and discretionary weakness, consumer transaction data is beginning to tell a different story.

The chart below reveals that both Target and its subsidiary Shipt are gaining steam on the digital front, with web growth far outpacing the most competent competitors.

In Q3 2024, TGT digital sales rose just over 10% YoY, with same-day services—powered by its Target Circle 360 membership and fulfilled by Shipt—expanding nearly 20%.

Google Trends shows significant traction in consumer interest in this membership (that comes with an annual fee) since launch last March.

Management has also made notable adjustments to address past challenges, particularly regarding inventory shrink.

CFO Jim Lee highlighted on the last earnings call that Target has enhanced asset protection, improved supply chain logistics, and invested in AI-driven loss prevention systems, delivering a 50-basis-point improvement in gross margin related to inventory shrink.

With a more efficient framework in place, the company is on track to strengthen margins and improve overall profitability.

Beyond security enhancements, the retailer has focused on categories that resonate with budget-conscious consumers.

Sales in essentials and beauty remain strong, while food and beverage continue to outperform broader retail trends. Apparel, previously under pressure, saw renewed traction in Q4, particularly in affordable and athleisure segments.

Target has also recalibrated its marketing strategy, adjusting its approach after previous controvery and boycotts related to its Pride collection and focus. Leadership has quietly refined its messaging, shifting emphasis back to core retail fundamentals.

Bottom Line: Target is showing signs of improvement, and the market still hasn’t caught on.

Despite persistent macroeconomic challenges, Target delivered an EPS of $1.85 in Q3 2024, maintaining steady profitability while investing in key growth areas. Operating income climbed 6.7% through the first three quarters, benefiting from disciplined cost management. Digital sales surged 10.8% YoY, with same-day services (Shipt, Target Circle 360) expanding nearly 20%. These numbers point to a business that is gaining traction in high-demand segments and optimizing operations for long-term success.

Looking ahead, here’s how we see things playing out for Target stock…

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