Target’s Stock Rally Raises Earnings Bar as Comeback Gains Steam

8b48]]7y5g}b998vi9e907xf_media_dl_1.png Bloomberg

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(Bloomberg) — Target Corp. has quietly emerged as one of this year’s hottest retail stocks, outperforming many staples and big-box peers. The rally has also raised the bar heading into quarterly results.

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Shares have surged 26% this year, on pace for their first annual gain in five years. But as impressive as the rally may be, Target’s stock has clawed back only about a fifth of the losses over the prior four years and at about $123 a share is a far cry from the all-time high of $266 back in 2021.

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“The results will be better and we’re early in the turnaround, but the setup in the short term, heading into the earnings report, is a little bit tricky because expectations are higher,” D.A. Davidson analyst Michael Baker said of Target, which reports Wednesday before the market opens.

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Analysts have grown more optimistic regarding the company’s short-term outlook: The average first-quarter adjusted earnings per share estimate for Target has risen 5.7% over the past month, according to data compiled by Bloomberg. Revenue expectations for the same period are up 1.2%.

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Target shares are often volatile following earnings, with moves of 5% or more for three of the last four reports.

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The improved stock performance reflects growing investor confidence that Target’s turnaround efforts are starting to bear fruit after years of missteps and disappointing results. The challenge will be sustaining the current momentum in the face of worsening consumer sentiment and higher energy prices due to the Middle East conflict.

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The retailer is seeking to reinvigorate operations under its new chief executive officer, Michael Fiddelke, after a three-year streak of weak sales. Fiddelke, a company veteran who started as an intern in 2003 and took the reins in February, vowed to improve merchandise, refresh stores and integrate technology more effectively. 

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The Minneapolis, Minnesota-based company is revamping assortment across beauty, baby, apparel, home and food — categories executives have identified as key areas for the business. It’s partnering with brands like Parke and Pokémon, and spending billions of dollars on store enhancements, staff training and technology.

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There’s still a wide performance gap between Walmart Inc. and Target, with the former holding the crown as the world’s largest traditional retailer thanks to a focus on low prices, household necessities and investments in technology. Walmart is also carrying more premium brands and making inroads with wealthier shoppers.

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Yet, there are signs that Target’s rebound could be durable. Visits to its stores during the first quarter were up 5.1% from the year prior, marking the chain’s first positive visit growth in more than a year, according to data from Placer.ai. The firm also notes traffic in April rose 5.5% from the previous year.

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“The quarter looks great and traffic appears to be strong, but underlying all of this is the fact that the comparisons are just exceptionally easy,” said John San Marco, an analyst at Neuberger Berman. “From here, the bar will start to get more difficult.”