Despite Near-Term Costs, Target’s Inventory Optimization Leaves It Well Positioned for the Future

Our $166 per share valuation of no-moat Target should not change significantly in light of its second-quarter earnings announcement. The impact of greater-than-expected profitability pressure (including 9 points of gross margin degradation, to 22%, versus our 7-point estimate) as Target cleared excess inventory should offset a time value of money-related adjustment. We continue to believe Target’s aggressive moves to right-size its inventory through markdowns and receipt cancellations have been prudent and do not suggest a change in its long-term prospects (mid-single-digit yearly revenue growth, high-single-digit operating margins forecast on average). We suggest prospective investors await a more attractive entry point.