Excess Inventory to Hold Target’s Near-Term Earnings in Check, but Our Long-Term View Is Intact

Our $171 per share valuation of no-moat Target should dip by a low- to mid-single-digit percentage after it disclosed that ongoing inventory mismatches should pressure near-term results to a greater extent than initially expected. Citing markdowns, removal and storage of excess inventory, and high costs, management reduced its guidance. The firm’s leadership now foresees operating margins around 2% in the second quarter and a roughly 6% second-half mark, down from around 5.3% and an implied mid- to high-single-digit level, respectively. Our 5% second-quarter margin forecast should fall in line with management’s new goal, with little change to our second-half assumption (already just short of 6%).