Raising Target's Fair Value on Omnichannel Strength

We plan to lift our $169 fair value estimate for no-moat Target TGT by nearly 10% after the company announced fourth-quarter results at its investor day. With fiscal 2021 results near our expectations, the uptick is driven by a more optimistic outlook for Target’s near- and long-term top-line prospects, considering its burgeoning omnichannel strength, and the rescission of our prior expectation that the U.S. corporate tax rate would rise this year. We suggest investors await a more attractive entry point.

Full-year sales of $106.0 billion trailed our $106.8 billion estimate, as we had expected more uplift from inflation, but the 8.4% operating margin beat our forecast by about 10 basis points as Target used its improving efficiency to offset cost pressures better than anticipated. For fiscal 2022, the firm expects low- to mid-single-digit revenue growth and low-single-digit operating income growth, better than our low-single-digit and roughly flat respective forecasts. We expect to lift our sights to consider Target’s omnichannel strength (digitally originated comparable sales rose 21% in fiscal 2021, contributing to 13% expansion overall) and efficiency as it scales across fulfillment methods. Target foresees mid-single-digit revenue and operating income growth long term; our 3% marks should rise by about 1 point, driven by higher top-line expectations to reflect benefits from partnerships (including narrow-moat Ulta’s shop-in-shops), an expanded same-day fulfillment lineup, and midsize store openings.

While Target has built a strong omnichannel capability, we believe the lack of switching costs in retail and the harder-to-differentiate aspects of its assortment keep it from developing an economic moat. Target’s long-term expectations imply little operating margin growth (consistent with our expectations) despite increasing scale, which we believe reflects the need to invest in capabilities and low pricing to keep pace with competitive pressure.

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