Target Earnings: Stock Craters Amid Weak Demand for Discretionary Items, Further Margin Pressure

Key Morningstar Metrics for Target Stock

• Morningstar Rating: 3 stars
• Fair Value Estimate: $140.00
• Morningstar Uncertainty Rating: Medium
• Economic Moat: None

What We Thought of Target’s Earnings

We plan to lower our $140 fair value estimate for Target TGT by a low-to-mid-single-digit percentage after the retailer’s third-quarter results of 1% top-line growth and $1.85 EPS landed well below our expectations. Management also cut its full-year EPS guidance to $8.30-$8.90 from $9.00-$9.70. Thus, we plan to reduce our forecast for fiscal 2024 comparable sales to a slight decline from a 0.5% gain and bring our EPS forecast to within management’s updated guidance range from our $9.31 preprint estimate.

Still, our planned fair value estimate cut does not rival the 20% intraday selloff in shares on Nov. 20, as we consider our longer-term outlook for 2.5% comparable sales growth and an operating margin of around 6.0%-6.5% to be intact.

Top-line results remained lackluster, as comp sales expanded a mere 0.3% (versus our forecast for a 2.0% gain) despite lapping an abysmal 5.0% drop last year. Modest growth in high-frequency categories was largely offset by weak demand for discretionary items, as management indicated consumers have grown increasingly selective with their spending. With nearly half of Target’s sales tied to apparel, hardlines, and home furnishings, we acknowledge that the firm is amply exposed to cyclical swings in consumers’ spending capacity.

We also surmise that Target is grappling with a stringent competitive landscape, as retailers have looked to drive traffic growth in recent quarters. Notably, Walmart WMT reported domestic comp growth of 5% in its most recent quarter. Walmart and Costco Wholesale COST have cited positive trends in general merchandise sales of late, contrasting with Target’s results.

Target’s operating margin declined 60 basis points to 4.6% as management cited myriad headwinds, including higher digital fulfillment costs, unfavorable mix, and expense deleverage from anemic sales growth. We expect the firm’s operating margin to languish around 5% until there’s a rebound in discretionary demand.