Target Set Up For a Strong Holiday Season

Our $107 fair value estimate for no-moat Target TGT should rise by a high-single-digit percentage after it posted third-quarter results that easily beat our forecasts. We believe the performance bodes well for the holiday season but still expect results to revert to our long-term forecast (low-single-digit percentage sales growth and 6% adjusted operating margins) once the pandemic eases, likely in mid-2021.

Third-quarter comparable sales rose 20.7%, well above our 9% target, driven by ticket size (up 15.6%) and traffic growth (4.5%) as customers continued to consolidate trips but visited Target stores and digital properties more often. Although digital sales contributed 11 points of comparable growth, we are encouraged by Target’s 10% in-store mark. With October seeing a similar overall growth rate, we expect momentum should carry into the holiday season, particularly as Target capitalizes on an expanded drive-up and pick up in store assortment. Cost leverage led Target’s adjusted operating margin up more than 300 basis points, to 8.5%, despite pandemic costs and higher wages.

With management refocusing on enhancing its assortment (through partnerships including an agreement to add Ulta outposts to 100 Target stores in 2021) and the current sales surge suggesting that the firm has ample capacity to continue fulfilling online orders via its stores, we believe Target has room for long-term growth. But our skepticism on its current valuation stems from a retail environment that should return to intense price competition after the pandemic eases (promotional pressure has abated amid the 2020 sales surge) and the limited ways in which sellers can secure customer loyalty, particularly when shoppers can check the competition’s pricing and availability in-store. These factors contribute to our no-moat rating, and we caution long-term investors to not lose sight of the challenging, more durable parts of the competitive environment amid the pandemic’s fleeting sales surge.

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