Target: Without Durable Edge, We Think No-Moat Firm Will Struggle To Unlock Robust Margin Gains

In light of the intensely competitive landscape in which it plays, we have lowered our fair value estimate on Target TGT to $141 per share from $165, primarily because we expect more modest long-term margin expansion (we now forecast a 7.0% midcycle operating margin, down from our previous forecast of 8.0%).

We acknowledge Target’s iconic brand and credit the firm’s management team for aggressively pursuing investments in recent years to renovate existing stores, drive digital engagement, and refine its omnichannel fulfillment operations—investments we view as necessary to prevent becoming another obsolete brick-and-mortar retailer. Nonetheless, we surmise the firm faces intense competition amid a dynamic retail backdrop–making it difficult to underwrite significant margin expansion beyond historical levels. Furthermore, we surmise that Target’s most lucrative product categories across apparel, home furnishings, and hardlines are acutely susceptible to burgeoning digital penetration as consumers can seamlessly price shop across retail outlets, putting more pressure on Target to offer competitive prices. As such, we expect Target to invest aggressively over the next decade to drive cost efficiencies across its business—such as through supply chain automation and sortation centers to optimize its home delivery route network—but note that competing retailers have been making similar investments.

Target delivered impressive results in recent years (the retailer’s top line ballooned by 40% compared with 2019) amid robust consumer spending and a virtually nonexistent promotional environment. However, the firm’s margins suffered in 2022 amid bloated inventory levels and a pullback in consumer spending. While we expect sales to remain constrained in the near term as consumer spending on discretionary goods continues to abate, we expect Target’s margins to gradually recover off of its depressed 2022 base as inventory normalizes, but not to peak levels.