Competitive Angst for Target; Costco Looks Rich

No-moat Target issued fourth-quarter results earlier this week that showed its transformation is starting to bear fruit, as transactions growth accelerated from last year. These results far outpaced the nearly flat transaction trends generated over the past decade, which we attribute to the 29% bump in digital sales. The picture remains mixed, however, when considering its operating margins were down and below our estimates. In our view, this narrowing of margins shows the level of competition and investment required to compete in the retail space, supporting our no-moat thesis. Incorporating these mixed results and the time value of money, we plan to increase our $63 fair value estimate by a low-single-digit percentage. Even after the stock has sold off, we still see shares as a bit overvalued.

Also this week, wide-moat Costco reported second-quarter results that show its moat is fully intact, with comparable-store sales up 8.4%. Unlike peers, Costco also boasted 20 basis points of operating margin expansion to 3.0%. Despite the noise resulting from a Thanksgiving date shift, results are tracking mildly better than our full-year estimates. Combining this with a slightly lower tax rate, we intend to raise our $163 fair value estimate by a mid-single-digit percentage. Shares are down slightly, but we don't think the current share price accounts for the competitive pressures that could ensue. As such, we believe prospective investors should await a larger margin of safety before investing.