Target Outperforms, but No Change to Our Long-Term View

A late-quarter sales surge led no-moat Target TGT to outpace our estimates, but we do not anticipate the outperformance to materially alter our long-term outlook (low-single-digit sales growth and 6% adjusted operating margins). So, we do not plan a large change for our $94 per share valuation and still believe investors should seek a more attractive entry point.

Target saw 10.8% comparable growth (near Walmart’s 10% result at its namesake U.S. stores, excluding fuel), meaningfully higher than the “more than 7%” quarter-to-date mark it announced on April 23 (the quarter ended May 2) and our 7.3% forecast. We concur with management’s view that stimulus checks likely contributed to the late-period spike, with normalizing mix as customers returned to discretionary and apparel categories leading Target’s full-period adjusted operating margin to 2.4%, 100 basis points above our forecast.

E-commerce fueled the expansion, soaring 141% on a comparable basis (to 15% of overall sales) as store comparable sales rose less than 1%. We are encouraged that Target has handled the digital tsunami well, with 95% of orders picked on time. The success validates Target’s use of its stores as omnichannel fulfillment centers, with the chain quickly adapting to the rapid channel shift. While we believe there are longer-term margin consequences to digitization, as fees for same-day services are likely to fall under competitive pressure and expose the higher costs associated with non-traditional channels, Target’s strong execution should develop some durable relationships with new shoppers.

We still believe the pandemic’s long-term consequences will be limited for Target, as it should be held captive by an intensely competitive long-term pricing environment. The pandemic should accelerate digitization, but the mix shift to higher fulfillment cost channels should be ameliorated to some extent by increasing scale benefits, leaving Target’s long-term operating margin near 2019’s 6% level.

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