Target Stock Needs a Spark. An Activist Investor Could Provide It.

Target opened “Target SoHo” - a design-focused concept store in New York City’s SoHo district, on Dec. 8. (Bryan Bedder/Getty Images for Target)

Key Points

• Toms Capital Investment Management has acquired a significant stake in Target, according to the Financial Times.
• Target’s stock is down 28% this year. Annual revenue has declined for two consecutive fiscal years.
• Target plans to invest $5 billion in 2026 to improve stores and merchandising. It recently announced layoff and changes in the C-suite.

Target’s recent struggles appear to have attracted an activist investor. It could be just the catalyst the stock needs, one analyst says.

Last week, the Financial Times reported that hedge fund Toms Capital Investment Management had built up a significant stake in Target, citing people familiar with the matter. The size of the stake is unknown.

A spokesman for TCIM declined to comment. A Target spokesman said the company maintained regular dialogue with the investment community as part of its robust shareholder engagement program.

“Target’s top priority is getting back to growth, and our strategy to do so is rooted in three strategic priorities: leading with merchandising authority, providing a consistently elevated shopping experience and leveraging technology,” the spokesman said.

TCIM has taken activist positions pushing for change at Kenvue , Kellanova, and U.S. Steel.

Target stock is up 7% over the past month, compared with a 0.8% increase in the S&P 500, and the fund’s involvement could help keep the rally going, Wolfe Research analyst Spencer Hanus says. The shares trade at about 15 times the earnings per share expected over the next year, and most investors expect profits to decline over that period, priming the stock for a so-called “hope trade,” Hanus wrote in a research note Monday.

A hope trade happens when investors buy a stock not because a company’s fundamentals are good, but because poor performance has already been reflected in the price, so any good news could move the stock higher.

In this case, the hope is that an activist could push the company to make big changes.

“An activist can help drive the ‘change narrative’ at Target, which would be a positive since the current messaging with Michael Fiddelke taking over as CEO has made it seem to investors that there won’t be much change,” Hanus wrote. “We don’t think that is a totally fair assessment, but perception is reality.”

Hanus rates Target stock at Underperform with an $81 price target, while the shares were at $97.72 on Tuesday morning.

This isn’t Target’s first tango with an activist investor. In the wake of Target’s announcement that current CEO Brian Cornell was stepping down, activist group The Accountability Board filed a shareholder proposal aimed at keeping him from chairing the board of directors.

And Bill Ackman’s Pershing Square Capital Management launched an activist campaign in the late 2000s, pushing for the company to spin off its real estate and sell its credit-card operations. Ackman’s campaign led to a proxy fight after the stock took a tumble in response to the 2007-09 financial crisis. Target eventually won.

Activists could again push for Target to sell off its real estate, a popular approach in other campaigns involving retailers. But Hanus said that would make him more cautious on the company’s longer-term future, given that most Tier one retailers still own a significant portion of their real estate.

Target stock is down 28% this year, reflecting investor concerns over the company’s market-share losses and sluggish sales. Annual revenue has declined for two consecutive fiscal years, falling 1.6% in the 12 months through January 2024, and 0.8% in the fiscal year ended this January.

Once viewed as a retail winner, Target has suffered from a dearth of merchandise, skimpy staff, and messy stores. High inflation and economic uncertainty exacerbated those issues, prompting consumers to spend less on the discretionary items that have long been Target’s forte.

On top of switching things up at the C-suite, Target is planning to invest $5 billion in 2026 alone to improve its stores and merchandising strategy. The company also recently announced layoffs.

Those efforts should help jump-start the business, Hanus wrote, but it will take time for them to show up in the results. And there is still more opportunity to improve, he added, such as increasing labor hours in stores, refreshing merchandise, and spending more on advertising.

Write to Sabrina Escobar at sabrina.escobar@barrons.com