Easily one of the biggest concerns regarding President Donald Trump’s second term in office was the matter of tariffs. Long characterizing the U.S. as a nation being ripped off by others, Trump portrayed himself as the sheriff cleaning up the town. However, trade wars can be ugly, which is what made retailers like Target (NYSE:TGT) exceedingly nervous. Fortunately, there could be a silver lining for TGT stock in all this mess.
To be sure, Target ranks as one of the riskiest ideas in the market right now. Since the beginning of the year, TGT stock fell almost 15%, an awfully inauspicious way to greet a fresh calendar. Further, the performance looks all the worse when stacked up against rival Walmart (NYSE:WMT), which while not doing well is at least up 1.5% year-to-date.
It must be said that Target is suffering from a double whammy. First, the big-box retailer is struggling against broader economic challenges. With rising inflation crimping households’ ability to pay for everyday necessities, consumers have had little choice but to reduce their spending. Add in the long-threatened tariffs against key economic partners — particularly China and Mexico — and TGT stock looks wildly risky.
Second, Target is facing sharp criticism for backtracking on its diversity, equity and inclusion (DEI) commitments. Admittedly, management put itself in an awkward position, pushing multiple views that didn’t align with many conservative shoppers’ sentiments. But then, walking back DEI initiatives creates pressure — and terrible optics — among the communities those programs were designed to help.
Target put itself in a no-win situation. Still, TGT stock — which is down almost 32% over the past 52 weeks — may be a very intriguing long-term opportunity.
While TGT stock on paper faces serious headwinds, it might also enjoy a reprieve. Ironically, the Trump administration — which has caused so much turmoil for Target in terms of the DEI fiasco — is the one extending the lifeline. As it turns out, the president may not be sure if imposing tariffs on Mexico and Canada is such a great idea.
Sure, the White House initially imposed a 25% tariff on America’s neighboring countries. However, he quickly provided exemptions and delays — an ebb and flow that has occurred for the second time in less than two months. True, the moves have unsettled investors. However, the bigger point is that the administration may be feeling the repercussions of the trade war and could eventually decide that the juice isn’t worth the squeeze.
In the meantime, while Target can hope for the best, the leadership team has the opportunity to diversify its sourcing strategies. Further, the company has a significant advantage when it comes to scale. As one of the biggest retailers in the nation, manufacturers are eager to do business with Target. This means it could potentially negotiate better terms, perhaps convince suppliers to absorb higher costs if tariffs are fully imposed.
Finally, from a valuation standpoint, TGT stock is difficult to ignore. Currently priced at 0.5X trailing-12-month (TTM) sales, the equity appears discounted. About a year ago, the revenue multiple was noticeably higher at 0.6X. Should prudence emerge in the political sphere, Target would be one of the names to watch closely.
