Target Reports Strong Fourth Quarter; Shares Rich

We plan to increase our $127 fair value estimate for no-moat Target TGT by a mid-single-digit percentage after the company posted strong fourth-quarter earnings. While management's outlook for fiscal 2021 operating margin is softer than our prior view, our long-term expectations remain (low-single-digit percentage sales growth, 6%-7% adjusted operating margins). Although Target has admirably adapted to sharp pandemic-era e-commerce growth, we suggest long-term investors await a more attractive entry point, considering long-term competition in a retail environment without meaningful customer switching costs. Comparable sales rose 20.5% in the quarter, beating our 17.5% estimate as surging COVID-19 cases, strong e-commerce execution, and economic stimulus led top-line expansion to accelerate in January from 17% during the holiday period. Full-year adjusted EPS of $9.42 also beat our $9.37 estimate as a result of the sales strength. Management provided an estimate of fiscal 2021's adjusted operating margin, suggesting a 6%-7% range, with the bottom half somewhat more likely. Our prior estimate was higher, at 6.7%; a continued relatively slow vaccine rollout still leaves that mark within reach, in our view. We remain unenthusiastic about the stock despite our planned fair value uptick (which reflects fourth-quarter outperformance and an adjustment for the time value of money) and the shares' mid-single-digit percentage swoon after the earnings report. Our more muted reaction to earnings likely comes because we were already skeptical of Target's ability to build on pandemic-era operating margins despite a strong omnichannel fulfillment capability centered on its stores. We also applaud Target's work to bolster its own-brand portfolio (around one third of sales) and strike partnerships with brands like Levi's, Apple, and Ulta but continue to believe its assortment is not differentiated enough to ward off long-term price pressure from larger rivals like Walmart and Amazon.

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