After Earnings, Is Target Stock a Buy, Sell, or Fairly Valued?

Target TGT released its first-quarter earnings report on May 22, 2024. Here’s Morningstar’s take on Target’s earnings and stock.

Key Morningstar Metrics for Target:

• Fair Value Estimate: $136.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Target’s Q1 Earnings

• Target’s top line remained under pressure in its first fiscal quarter, as comparable sales declined 3.7% (driven by a nearly 2% drop in both traffic and average ticket). Not to our surprise, demand for discretionary categories continued to be soft. However, management also cited modest sales declines in its frequency categories (such as food and household essentials), which we think points to market share losses.
• We surmise that weakness in Target’s frequency categories may be indicative of consumers finding better value elsewhere, such as Walmart, Costco, and Aldi. We think this softness may have prompted Target to recently announce price reductions across 5,000 frequently shopped items. We wouldn’t be surprised to see Target become increasingly price-conscious to attract consumers back to its store through the remainder of the year.
• After shedding about 8% following its earnings release, shares of no-moat Target currently trade in 3-star territory.

Fair Value Estimate for Target

With its 3-star rating, we believe Target’s stock is fairly valued compared with our long-term fair value estimate.

We raised our fair value estimate to $136 per share from $132 following the firm’s fiscal 2023 fourth-quarter results. The company’s bottom line easily outpaced our expectations amid better-than-expected margin improvement, and management issued fiscal 2024 comparable sales guidance that exceeded our forecast. As such, the uptick in our fair value estimate stems primarily from both the time value of money and our upward adjustment to our fiscal 2024 comp sales outlook—we raised our forecast to a 50-basis-point increase compared with our prior expectations for a low-single-digit decline. Despite our more optimistic near-term growth outlook, we maintain our contention that Target lacks a durable competitive edge amid an intensely competitive retail landscape, keeping our long-term top-line and margin outlook intact. Our fair value estimate implies a forward fiscal 2024 adjusted P/E of 15.0 times and enterprise value/adjusted EBITDA of 8.4 times.

Read more about Target’s fair value estimate.

Economic Moat Rating

We do not believe Target warrants an economic moat. Despite its iconic and trendy brand, we view Target’s position in the hypercompetitive retail environment as rather ambiguous, which dilutes our confidence in the durability of its brand to drive consistent store traffic. Furthermore, we don’t see sufficient evidence to award Target a cost advantage. Although it is the nation’s sixth-largest retailer, we do not believe the firm exhibits unreplicable scale across its individual product categories that would suggest it has amassed negotiating prowess over its supplier partners.

Read more about Target’s moat rating.

Financial Strength

After three years in which it saw its top line balloon by nearly 40%, Target finds itself in a strong financial position with a conservative debt ratio (net debt/2023 EBITDA stood at 1.2 times) and ample liquidity. At the end of its 2023 fiscal year, the retailer had about $14 billion in debt and held $3.8 billion in cash (plus $4 billion in an untapped revolving facility). This is consistent with its past mantra, as the company has prioritized operating with a strong balance sheet for more than two decades (net debt/EBITDA has averaged 1.6 times since 2000).

Read more about financial strength.

Risk and Uncertainty

The rise of digital penetration serves as a formidable threat to Target’s traditional brick-and-mortar retail model. Price shopping has become rather seamless as consumers increasingly begin their product searches via digital channels, making Target susceptible to price competition amid an industry where consumers face virtually no switching costs. The retail industry’s preemptive leaders—Walmart and Amazon.com—boast unrivaled scale and an impressive ability to invest in supply chain automation to mitigate costs. We expect Walmart and Amazon to serve as disinflationary forces in the industry for years to come, putting pressure on retailers that lack a differentiated product offering, vast scale, or a concentrated geographic focus (we believe Target falls into all three categories). As such, we think that gross margins may be pressured over the following decade.

Read more about Target’s risk and uncertainty.

TGT Bulls Say

• Given its iconic brand that attracts consumers with its promise of a more gratifying customer experience compared with other low-cost retailers, we are confident in Target’s ability to drive recurring foot traffic.
• Based on its performance during the pandemic, we view Target as a formidable online retailer, putting to rest many concerns about its ability to compete in a digital retail environment.
• Target is poised to benefit from the continued decline of mall-based competition and department stores, which will drive strong growth in comparable sales.

TGT Bears Say

• Target lacks the scale and differentiation to drive significant market share across its product categories, since its product offerings lack a clear value proposition.
• Despite being the nation’s sixth-largest retailer, Target must constantly invest in cost-saving initiatives, product innovation, and store renovations just to keep up with behemoths Walmart and Amazon.
• Target’s higher-margin discretionary product categories, such as apparel and home furnishings, are susceptible to losing market share via digital retail penetration, which could weaken the firm’s margins.

This article was compiled by Krutang Desai.