Target Earnings: Margins Show Encouraging Improvement, but Sales Remain Weak

Key Morningstar Metrics for Target

• Fair Value Estimate: $132.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Target’s Earnings

We were impressed by Target’s TGT robust margin recovery during its fiscal fourth quarter, though we are concerned by continued softness in its top-line results. The retailer’s 5.8% operating margin (210 basis points ahead of last year) easily outpaced our 4.4% estimate, driven by a nearly 300-basis-point expansion in gross margin to 25.6% as normalized inventory levels reduced the need for inordinate promotional destocking that was pervasive across the retail landscape last year. Due to this margin strength, Target posted $2.98 in earnings per share, outpacing our $2.11 forecast. The market looked favorably on the firm’s strong margin improvement and earnings beat, with its stock trading more than 10% higher on March 5.

While we plan to modestly raise our $132 fair value estimate in light of Target’s stronger-than-expected near-term margin recovery, we maintain our contention that the firm lacks a defensible competitive edge in an intensely competitive retail landscape. Thus, we maintain our 6.5% midcycle operating margin forecast. Management noted that it is striving to achieve a long-term operating margin of at least 6% (up from 5.3% in fiscal 2023), well below the 8% goal cited in early 2022, as we expected.

Furthermore, we caution investors from taking an overzealous view of the firm’s fourth-quarter release due to continued top-line pressure. Target’s 4.4% drop in comparable sales (transactions and tickets declined 1.7% and 2.8%, respectively) marks the third consecutive quarter of declines, and it stands in stark contrast with Walmart’s WMT 4% gain. While management expects comparable sales to recover modestly in fiscal 2024 (guidance was flat to up 2%), we think the top line is at risk of being further constrained in the near term—as value-conscious consumers may peruse the banners of lower-priced competitors—before returning to a low-single-digit percentage growth trajectory longer term.