IS the “Tarjay” magic back? Investors certainly think so.

       Shares in former high-flying retailer Target Corp rose the most since since 2019 after posting third-quarter earnings on Wednesday that exceeded Wall Street’s estimates.

       But shareholders shouldn’t get too carried away. This is clearly an improvement on recent quarters, when the Minneapolis-based company suffered a series of missteps in terms of inventories and navigating the culture wars. The coming holiday season will be the real test of whether the chain has finally moved past its trouble.

       Target’s adjusted earnings per share came in at US$2.10, easily beating the US$1.47 a share median estimate of analysts surveyed by Bloomberg.

       And although comparable store sales fell 4.9% in the three months ended Oct 28 from a year earlier, the decline was not as great as Wall Street feared.

       Target attributed the strong performance to slimmer inventory levels, which were down 14%. This meant it didn’t need to discount products to get them off the books, allowing its stores and distribution centres to run more efficiently.

       Under chief executive officer (CEO) Brian Cornell, Target in 2017 bucked industry trends at the time. So while other retailers were de-emphasising physical stores in favor of digital retailing,

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       Target made its network of almost 2,000 stores the heart of its strategy. It spruced up its real estate and nodded toward digital by leveraging its locations as hubs for its online business, a strategy that is now commonplace across the retail sector.

       Add in a suite of private labels and collaborations with designer brands, and pandemic era sales soared.

       Revenue went from US$75.4bil in fiscal 2019 ended Feb 1 to US$106bil in fiscal 2022 ended Jan 29.

       But since Americans emerged from the Covid-19 lockdowns, Target has struggled to translate its strategic strengths into superior performance.

       First there was the inventory snafu, where it ordered more supplies of bikes and casual clothing just as shoppers turned to suitcases and smarter attire.

       Yes, Target wasn’t alone in miscalculating inventory and consumer desires, but it took the company an extended period of time to work through the backlog, weighing on profits. Then earlier this year, Target angered certain shoppers by selling products tied to LGBTQ Pride Month. The company bungled the response to the backlash, further hurting revenue.

       Missing the bullseye

       Consequently, Target’s stock tumbled 52% from the end of 2021 through Tuesday while the stock of rival Walmart Inc soared 16% to an all-time high.

       Before Wednesday’s earnings release, Target’s shares traded on a forward price-to- earnings ratio of about 13 times, compared with about 24 times for Walmart shares.

       So, you can’t blame long-suffering investors for feeling a sense of relief that Target is finally putting its operational challenges in the past. But caution is still warranted. Target generates around 30% of its sales from food and drink, household essentials and pet supplies, compared with the almost 60% of sales from grocery at Walmart’s US business, according to retail analysts at GlobalData.

       What this means is that Target still relies much more on goods that consumers feel are nice to have rather than must have at a time when the economy is forecast to slow and unemployment to rise.

       Target said it was still experiencing weaker demand in clothing and home furnishings, although there had been an improvement compared with the second quarter.

       Pressure on these categories was offset by increased sales of the products that consumers buy more frequently, such as beauty supplies.

       Inflation moderating

       While inflation is moderating, which should help Target, other headwinds, such as from higher interest rates and the resumption of student loan payments, may weigh on sales of discretionary items.

       CEO Cornell said consumers were delaying spending until the last moment. For example, shoppers who would normally buy winter clothes, such as denim or sweatshirts in August or September, are holding off until the weather turns cold.

       Against this backdrop, Target must continue to improve its execution. It must ensure that its stores are attractive places to shop, with full shelves and plenty of staff. And although the company has done well to control costs, the key is to make sure such measures don’t erode shoppers’ experience.

       So it’s encouraging to hear that Target is investing more in training store employees.

       Target should also freshen up its product ranges, led by its private labels, to ensure that consumers are attracted not only to its value, but by frequent deliveries of new products, something that becomes even more important when times are tough.

       Target’s value kitchenware range – Figmint – and a new line of jewellery with fashion designer Kendra Scott, are steps in the right direction, but it shouldn’t stop there.

       Most importantly, Target must avoid any more self-inflicted wounds. A successful holiday season, tricky for retailers to navigate at the best of times, would go a long way toward reassuring investors that Target is again moving in the right direction.

       Target’s goals should be no less than regaining its reputation as the place for cheap chic and its status as one of America’s best run retailers. — Bloomberg

       Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. The views expressed here are the writer’s own.