Target Earnings: Sales Inflection Could Prove Fleeting Amid Mounting Competition

Key Morningstar Metrics for Target

• Fair Value Estimate: $136.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Target’s Earnings

At first blush, Target TGT chalked up decent second-quarter results, as comparable store sales grew 2% and operating margins jumped 160 basis points to 6.4%, resulting in a low-double-digit surge in the stock price. However, upon further review, we’ve taken a tempered stance.

For one, while the turn to positive same-store sales after four quarters of declines is a plus, the firm was lapping a disastrous period last year, during which comparable store sales slumped 5.4% on a 4.8% reduction in transactions following consumer backlash over its Pride month assortment. We recognize that Target has taken strides since then—making necessary investments to enhance its assortment, price points, store experience, and omnichannel supply chain—but we’re skeptical about whether the benefits will hold, given its undifferentiated product assortment and lack of a clear cost advantage relative to other discount retailers.

In this context, the firm’s comp was still a far cry from the 4.2% growth Walmart WMT boasted in its US arm in the most recent period. Beyond the sales line, we also doubt Target is poised to extract much more in the way of margin gains over the next several years, as we believe it will need to continuously reinvest in its supply chain to drive cost efficiencies across procurement and multichannel order fulfillment to deliver competitive prices.

Even as management revised its fiscal 2024 outlook to call for comparable store sales growth in the lower half of its prior aims (flat to up 2%) and EPS of $9.00-$9.70 (from $8.60-$9.60), our preprint marks of 0.5% growth and EPS of $9.13 square with these ranges. As such, we don’t foresee a material change to our fair value estimate of $136 per share. But after the ascent in shares, we now see the stock trading in a range that we’d consider inflated. We think investors should await a more attractive risk/reward opportunity before stocking up.