Target Earnings: Better-Than-Expected Results Overshadowed by Management’s Cautious Outlook

Key Morningstar Metrics for Target

• Fair Value Estimate: $135.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Target’s Earnings

After digesting Target’s TGT fiscal 2024 fourth-quarter earnings release, we don’t plan to alter our $135 fair value estimate materially. Results looked solid as comparable sales expanded 1.5%, outpacing our forecast for flat growth. And while its operating margin declined 110 basis points to 4.7% due to factors such as higher costs associated with digital fulfillment and wages, the performance still came in better than our 4.3% forecast. Despite the positive results, we plan to lower our forecast for fiscal 2025 comparable sales growth to about flat (from 2.5%), consistent with the firm’s guidance for the full year.

Shares declined by a low-single-digit percentage on March 4, which we think is a result of management’s tepid sales outlook. Indeed, management noted that demand for discretionary items deteriorated in February (the first month of fiscal 2025) amid waning consumer confidence. Management also cited tariffs as an added layer of uncertainty that may affect consumers' appetite.

With about 50% of Target’s sales derived from discretionary categories such as apparel, electronics, and home furnishings, we acknowledge that the retailer is susceptible to cyclical swings in consumer demand. The firm posted double-digit comparable sales growth in 2020 and 2021, when demand for discretionary goods was robust. While fiscal 2025 looks poised to be tumultuous, we still think the company can post low-single-digit comparable sales growth in the longer term, roughly consistent with our expectations across the retail industry.

Comparable sales growth in the fourth quarter was underpinned by a 2% gain in transaction count as consumers flocked to Target’s digital channels. For the full year, about 20% of Target’s sales were originated online, up from 9% in 2019. We commend Target for embracing the online channel but acknowledge that stringent competition from omnichannel retailers (like Walmart WMT) still exists.