Target shares are soaring as store sales rebound. Is it too late to buy the stock?

With the results of the second quarter, the shares of Goal (TGT 1.07%) rose as investors cheered the quarterly report and guidance. The stock rose 11% during the earnings session, helping the company rebound after its shares languished for much of the summer.

Let’s take a look at what got investors excited and whether it’s too late to buy the stock after the recent rally.

Focus on branch sales and gross profit margins

Target reported solid second-quarter results. Revenue rose nearly 3% year over year to $25.5 billion and adjusted earnings per share (EPS) rose 42% to $2.57, beating analyst consensus expectations for revenue of $25.2 billion and adjusted earnings per share of $2.18.

Comparable-store sales rose 2%, marking the retailer’s first positive comparable-store sales in five quarters. The gains were driven by a 3% increase in foot traffic, although average sales declined. E-commerce sales, meanwhile, rose 8.7%.

Beauty was a standout category for Target, with the segment reporting comparable-store sales growth of 9%. Apparel comparable sales were also solid, up 3%, led by low double-digit growth from the All In Motion brand. Food and beverage and convenience both reported low single-digit growth.

Target also continued to grow its loyalty program membership, adding 2 million new members in the quarter. The company now has over 100 million loyalty programs. The program was relaunched and redesigned in the first quarter of this year to give customers more options when using it.

Another key metric that impressed was gross margins, which rose 190 basis points from 27% to 28.9%. Target has long struggled with a shrinkage problem due to organized theft in its stores. Shrinkage is the amount of merchandise that is lost, damaged, spoiled, stolen, or simply cannot be sold. The lower shrinkage accounted for 90 basis points of the gross margin improvement.

Last year, Target said it recorded $500 million more shrink than in 2022, which management said was largely due to theft. The company has worked to address the problem, and those efforts have been reflected clearly in improved gross margins. A combination of expanding the use of locked display cases and working with law enforcement has contributed to the improvement.

Image source: Getty Images.

Looking ahead, Target reiterated its guidance for full-year store sales growth of 0% to 2%. However, the company raised its guidance for full-year adjusted earnings per share to $9 to $9.70, up from the previous guidance of $8.60 to $9.60.

For the third quarter, the company also forecast an increase in like-for-like sales between 0% and 2%. Adjusted earnings per share are expected to be between $2.10 and $2.40.

Given the uncertain macroeconomic environment, management is taking a cautious approach with its forecast, but is committed to success.

Is it too late to buy the stock?

Despite the gains, Target stock is still trading at a large discount to its competitor Walmart (WMT 0.16%)The company’s price-to-earnings (P/E) ratio is 15 times analyst estimates for next year, compared to nearly 28 times for its larger rival.

TGT P/E ratio (Forward 1 year) data from YCharts.

I think Walmart deserves a premium due to its stronger growth, larger size, and more defensive nature, but I don’t think the gap should be as wide as it is now.

As Target begins to resolve its shrinkage problem and store sales begin to increase, the retailer is looking up again. The company is now more economically sensitive than Walmart, as the latter benefits more from the trade-down effect and higher grocery sales. However, if the economy holds up, Target appears well positioned to continue its current turnaround.

Since Target has only just begun to fix the shrink and store issues that have plagued the company, and the stock is attractively valued, it doesn’t seem too late to buy the stock. As a result, long-term investors should feel comfortable adding the stock to their portfolio at current levels, even after the post-earnings rally.