Target Sales Disappoint, Long-Term Value Is Promising

We had higher expectations for no-moat Target’s TGT first quarter (ending May 2) than those suggested by its quarter-to-date results, but we do not expect to make a large change to our $97 fair value estimate. Our long-term expectations remain the key value driver and still incorporate low-single-digit sales growth and 6% adjusted operating margins.

In all, quarter-to-date comparable sales are up more than 7%, with a slight decrease in in-store sales and online sales that have more than doubled. We had called for low-double-digit expansion overall, a mark consistent with Target’s March results, but its 5% expansion in April to date represents a faster fall-off than we had expected. The stores have seen midteens April declines, with digital comparable sales up 275%. Sales performance has been bifurcated, with sales in essentials and grocery up 40% in March and 12% in April and hardlines up 20%-30% across the two months, but apparel and accessories have fallen roughly 30%-40%. The channel shift, dramatic skew toward lower-margin essentials and grocery items, and apparel inventory write-downs lead management to expect Target’s first-quarter operating margin to fall more than 5 points; we had called for around 1.

Still, we do not anticipate the pandemic will have a meaningful effect on Target’s long-term competitive standing, which is the main driver of our valuation. We continue to anticipate that a rough fiscal 2020 will be followed by a fiscal 2021 that returns the firm to its prior trend, albeit with some accelerated pressures from digitization as we suspect some shoppers who become acclimated to online grocery shopping will likely remain in the (higher-cost) channel. While Target does not benefit from an economic moat, in our view, as its iconic brand is not sufficient to guarantee returns in an environment without customer switching costs, we trust the firm will be able to continue its omnichannel transition.

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