Target Earnings: Margins Improve, but Sales Suffer From Discretionary Declines

Target Stock at a Glance

• Fair Value Estimate: $139.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None

Target Earnings Update

Target TGT delivered mixed second-quarter results, with encouraging margin improvement but top-line pressure in its discretionary product categories. Against a precarious economic backdrop, the retailer reduced its 2023 earnings per share guidance to $7.00-$8.00 from $7.75-$8.75, and it expects full-year comparable sales to fall by a mid-single-digit percentage.

Encouragingly, Target’s inventory levels continued to normalize, with inventory in discretionary product categories down 25% compared with the prior year, reducing the need for significant promotional destocking. Nonetheless, we are lowering our fair value estimate to $139 per share from $141 to account for the more pronounced pullback in near-term expectations.

Comparable sales declined 5.4%—the company’s first such drop since 2017—amid a steep 4.8% pullback in transaction volume during the quarter. The retailer’s higher-frequency categories, such as food and beverage, beauty, and household essentials, posted low- to mid-single-digit sales growth, but this was more than offset by double-digit declines in discretionary product categories such as apparel, hardlines, and home furnishings. Management said the top line also faced pressure amid homophobic agitation over the firm’s Pride merchandise in May, as comparable sales declined 3% in May and 7% in June.

We expect Target’s sales mix to skew toward its higher-frequency categories in the coming quarters as economic uncertainty and continued spending on services weigh on demand for the retailer’s higher-margin discretionary items. While Target’s margins recovered off last year’s depressed base due to less promotional activity (operating margin of 4.8% improved 360 basis points), they remain constrained relative to historical levels. As such, we maintain our forecast for operating margin to return to 6% by fiscal 2025.