Target Sees Strong Q1 Despite Difficult Comparisons

A mid-single-digit percentage increase is likely for our $138 per share valuation of no-moat Target TGT after it posted exceptional 23% first-quarter comparable growth despite difficult late-quarter comparisons with the early days of the pandemic in 2020 (Target saw 11% expansion in the same quarter last year). As we attribute the outperformance to pandemic-related factors, our long-term forecast is unchanged (low-single-digit percentage sales growth, 7% adjusted operating margins, on average). We need to see durable strength under normalized conditions to reassess our determination that the chain does not enjoy a sustainable competitive advantage, and suggest long-term investors await a more attractive entry point considering rising competition.

We had expected the increasingly difficult comparisons to strain first-quarter results more (our first-quarter forecast called for a 10% uptick). Management expects mid- to high-single-digit percentage comparable growth in the second quarter and a positive second-half rate of expansion; we forecast mid- and low-single-digit declines, respectively, considering the difficult comparisons. Based on the first-quarter strength even as American life moves closer to normal, we plan to lift our expectations toward guidance, with cost leverage improving operating margin (from our prior mid-single-digit estimate to the high single digits, though lower than Target’s 9.8% first-quarter mark).

The strong performance was broad-based but unsurprisingly most robust in categories like apparel that saw steep declines in the early days of the pandemic (category comparable sales up more than 60% after falling around 20% in the same period last year). Similarly, the stores drove growth, with comparable sales up 18%, though digital sales rose 50%. As conditions normalize, we expect competitive dynamics to resume, forcing price competition that we believe will not spare Target, driving long-term operating margins back into the midsingle digits.

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