Target Earnings: Margins Hold Up, but Top Line Constrained by Weak Discretionary Spending

Key Morningstar Metrics for Target

• Fair Value Estimate: $136.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Target’s Earnings

Target’s TGT fiscal 2024 first-quarter results landed mostly in line with our expectations, and we do not plan to materially alter our fair value estimate of $136 per share. Its shares are in fairly valued territory after shedding about 7% in early trading on May 22.

Comparable sales for the quarter fell 3.7% (versus our estimate for a 4% decline) amid a nearly 2% drop in traffic and average ticket. Management characterized the broader spending environment as resilient but noted that discretionary categories, such as home and hardlines, remain under pressure. Frequency items, such as food and household essentials, also suffered a modest decline amid weak unit volumes and lackluster pricing gains, which we think implies market share losses.

We surmise the firm’s weakness in nondiscretionary categories helped prompt its recent announcement of price reductions across 5,000 frequently shopped items. As consumers more acutely prioritize spending on high-frequency goods, Target’s undifferentiated product assortment and lack of a clear cost advantage over other discount retailers make its value proposition precarious. We think this dynamic is seen in the firm’s recent top-line underperformance compared with its principal competitor, Walmart WMT, which posted comp sales growth of nearly 4% in the quarter. Still, we forecast Target’s full-year comparable sales growth to land near the low end of management’s guidance range of flat to 2%, as we think the firm’s top line should improve in coming quarters due to lapping easier comps.

Positively, Target’s operating margin improved 10 basis points to 5.3% as a 140-basis-point increase in gross margin more than offset expense deleveraging on SG&A. We forecast about 20 basis points of operating margin expansion for the full year, though our 5.5% estimate lags Target’s 10-year average of 6.2%, as we expect price competition to intensify across the retail landscape.