Company Reports

Target has built a well-known brand over the past several decades, establishing itself as one of the nation’s leading retailers focused on delivering a gratifying in-store shopping experience while boasting an assortment of trendy apparel, home goods, and household essentials at competitive prices. Since 2014 under CEO Brian Cornell, Target has revamped its brand image after several years of lackluster performance and strategic missteps. The company has peeled back its investments to expand its physical footprint in recent years, instead focusing on driving cost efficiencies throughout its supply chain, renovating existing stores, and building out its omnichannel fulfillment capabilities through its "stores as hubs" model.

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.

Target has built a well-known brand over the past several decades, establishing itself as one of the nation’s leading retailers focused on delivering a gratifying in-store shopping experience while boasting an assortment of trendy apparel, home goods, and household essentials at competitive prices. Since 2014 under CEO Brian Cornell, Target has revamped its brand image after several years of lackluster performance and strategic missteps. The company has peeled back its investments to expand its physical footprint in recent years, instead focusing on driving cost efficiencies throughout its supply chain, renovating existing stores, and building out its omnichannel fulfillment capabilities through its "stores as hubs" model.

No-moat Target’s fiscal 2024 first-quarter results landed mostly in line with our expectations and we do not plan to alter our $136 fair value estimate materially. Shares trade in fairly valued territory after shedding about 7% in early trading on May 22.

Target has built a well-known brand over the past several decades, establishing itself as one of the nation’s leading retailers focused on delivering a gratifying in-store shopping experience while boasting an assortment of trendy apparel, home goods, and household essentials at competitive prices. Since 2014 under CEO Brian Cornell, Target has revamped its brand image after several years of lackluster performance and strategic missteps. The company has peeled back its investments to expand its physical footprint in recent years, instead focusing on driving cost efficiencies throughout its supply chain, renovating existing stores, and building out its omnichannel fulfillment capabilities through the firm’s "stores as hubs" model.

We were impressed by no-moat Target’s robust margin recovery during its fiscal 2023 fourth quarter, though we are concerned by continued softness in the retailer’s top-line results. The firm’s 5.8% operating margin (210 basis points ahead of last year) easily outpaced our 4.4% estimate, driven by a nearly 300-basis-point expansion in gross margin to 25.6% as normalized inventory levels reduced the need for inordinate promotional destocking that was pervasive across the retail landscape last year. Due to this margin strength, Target posted $2.98 in earnings per share, outpacing our $2.11 forecast. The market looked favorably on Target’s strong margin improvement and earnings beat with the stock trading more than 10% higher on March 5.

No-moat Target delivered solid third-quarter results as gross margin improvement outweighed the retailer’s second consecutive quarter of comparable sales declines. The firm posted $2.10 in earnings per share—surpassing its previous guidance of $1.20-$1.60—and raised the midpoint of its full-year EPS guidance by 9%. Despite the strong results, we think Target’s operating margin recovery from 2022 lows will take longer to fully materialize—we forecast a 6.0% operating margin by fiscal 2026 and a midcycle margin of 6.5%, down from 7.0% previously. Consumer spending continues to show signs of softening and while we surmise that the retailer is capable of adequately navigating a precarious holiday season, we still expect Target’s top line to be pressured through the remainder of the year and into 2024. Given our subdued sales outlook and our view that competitive angst among retailers is likely to intensify, we lower our fair value estimate by about 5% to $132 per share.

Target has built a well-known brand over the past several decades, establishing itself as one of the nation’s leading retailers focused on delivering a gratifying in-store shopping experience while boasting an assortment of trendy apparel, home goods, and household essentials at competitive prices. Since 2014 under CEO Brian Cornell, Target has seemingly revamped its brand image after several years of lackluster performance and strategic missteps. The company has peeled back its investments to expand its physical footprint in recent years, instead focusing on driving cost efficiencies throughout its supply chain, renovating existing stores, and building out its omnichannel fulfillment capabilities through the firm’s "stores as hubs" model.

No-moat Target delivered mixed second-quarter results, as the retailer showed encouraging margin improvement but faced top-line pressure in its discretionary product categories. Against a precarious economic backdrop, the retailer reduced its 2023 earnings per share guidance to $7.00-$8.00 from $7.75-$8.75 and expects full-year comparable sales to fall by a mid-single-digit percentage. Encouragingly, Target's inventory levels continued to normalize, with inventory in discretionary product categories down 25% compared with the prior year, reducing the need for significant promotional destocking. Nonetheless, we are lowering our fair value estimate to $139 per share from $141 to account for the more pronounced pullback in near-term expectations.

Target has built a well-known brand over the past several decades, establishing itself as one of the nation’s leading retailers focused on delivering a gratifying in-store shopping experience while boasting an assortment of trendy apparel, home goods, and household essentials at competitive prices. Since 2014 under CEO Brian Cornell, Target has seemingly revamped its brand image after several years of lackluster performance and strategic missteps. The company has peeled back its investments to expand its physical footprint in recent years, instead focusing on driving cost efficiencies throughout its supply chain, renovating existing stores, and building out its omnichannel fulfillment capabilities through the firm’s "stores as hubs" model.

In light of the intensely competitive landscape in which it plays, we have lowered our fair value estimate on Target to $141 per share, from $165, primarily because we expect more modest long-term margin expansion (we now forecast a 7.0% midcycle operating margin, down from our previous forecast of 8.0%).

Target has built a well-known brand over the past several decades, establishing itself as one of the nation’s leading retailers focused on delivering a gratifying in-store shopping experience while boasting an assortment of trendy apparel, home goods, and household essentials at competitive prices. Since 2014 under CEO Brian Cornell, Target has seemingly revamped its brand image after several years of lackluster performance and strategic missteps. The company has peeled back its investments to expand its physical footprint in recent years, instead focusing on driving cost efficiencies throughout its supply chain, renovating existing stores, and building out its omnichannel fulfillment capabilities through the firm’s "stores as hubs" model.

Target has adapted to retail digitization, but we posit it faces a highly competitive environment with negligible customer switching costs, exacting pressure to elevate service while holding prices low. Without the scale of Walmart and Amazon or the differentiated business models that characterize moat-endowed defensive retailers we cover, we expect no-moat Target will be vulnerable to the competitive onslaught.

Target has adapted to retail digitization, but we believe it faces a highly competitive environment with negligible customer switching costs, exacting pressure to elevate service while holding prices low. Without the scale of Walmart and Amazon or the differentiated business models that characterize moat-endowed defensive retailers we cover, we expect no-moat Target will be vulnerable to the competitive onslaught.

Our $171 per share valuation of no-moat Target should not change much after it announced first-quarter earnings that suggest it is on pace to approximate our full-year targets. We see no reason to alter our long-term forecast materially, as we are still expecting mid-single-digit yearly revenue growth and high-single-digit operating margins forecast on average. We advise prospective investors to await a more attractive entry point.

Target has adapted to retail digitization, but we believe it faces a highly competitive environment with negligible customer switching costs, exacting pressure to elevate service while holding prices low. Without the scale of Walmart and Amazon or the differentiated business models that characterize moat-endowed defensive retailers we cover, we expect no-moat Target will be vulnerable to the competitive onslaught.

We don’t expect a material change to our $177 fair value estimate after unpacking no-moat Target’s fourth-quarter marks. Its full-year top- and bottom-line results of $109 billion and $5.98, respectively, outpaced our $108.4 billion and $5.43 estimates, but the 2023 outlook (comparable sales growth ranging from a low-single-digit decline to a low-single-digit increase and $7.75-$8.75 in diluted EPS) was disappointing. Shares edged up about 3% on the print, and while still offering a modest discount, we think investors should await a larger margin of safety.

Although no-moat Target has had a difficult fiscal 2022 amid rapidly shifting demand, sales mix challenges, and rising costs and competitive pressure, we believe market sentiment does not adequately credit its improving omnichannel capabilities or its growing efficiency. Reflecting these factors and the time value of money, we are raising our valuation to $177 per share from $167. We see opportunity in the shares for long-term investors comfortable with what should be a volatile fourth quarter and fiscal 2023 on account of macroeconomic pressures.

Target has adapted to retail digitization, but we believe it faces a highly competitive environment with negligible customer switching costs, exacting pressure to elevate service while holding prices low. Without the scale of Walmart and Amazon or the differentiated business models that characterize moat-endowed defensive retailers we cover, we expect no-moat Target will be vulnerable to the competitive onslaught.

Despite no-moat Target shares’ low-teens percentage plunge in the wake of disappointing third-quarter earnings, our $167 per share valuation should not change materially, as we attribute the softness to near-term factors. Consequently, our long-term forecast remains intact (mid-single-digit yearly revenue growth, high-single-digit operating margins forecast on average). We see opportunity in the shares, as prevailing sentiment seems overly fixated on near-term woes.