Target Earnings: Sales Inflection Could Prove Fleeting Amid Mounting Competition; Shares Rich

At first blush, no-moat Target chalked up decent second-quarter results, as comparable store sales grew 2% and operating margins jumped 160 basis points to 6.4%, resulting in a low-double-digit surge in the stock price. However, upon further review, we’ve taken a tempered stance. For one, while the turn to positive same-store sales (after four quarters of declines) is a plus, the firm was lapping a disastrous period last year during which comparable store sales slumped 5.4% on a 4.8% reduction in transactions following consumer backlash around its Pride month assortment. We recognize that Target has made strides since then—making necessary investments to enhance its assortment, price points, store experience, and omnichannel supply chain—but we’re skeptical the benefits will hold given Target’s undifferentiated product assortment and lack of a clear cost advantage relative to other discount retailers, particularly amid an intensely competitive retail landscape. In this context, Target’s comp was still a far cry from the 4.2% growth wide-moat Walmart boasted in its US arm in the most recent period. Beyond the sales line, we also doubt the firm is poised to extract much more in the way of margin gains over the next several years, as we believe Target will need to continuously reinvest in its supply chain to drive cost efficiencies across procurement and multichannel order fulfillment to deliver competitive prices.