Target Corp TGT

We don’t expect to materially alter our $151 fair value estimate for no-moat Target (beyond a low-single-digit rise for time value) after digesting the firm’s stellar second-quarter results. Comparable sales popped 8.9% in the period, an impressive feat on top of the 24% marks chalked up last year. Similar to the sequential quarter, Target’s growth primarily emulated from the store channel (which boasted comps of 8.7% on top of 10.9% gains a year ago), showcasing that consumers are returning to brick-and-mortar outlets as vaccination rates have increased. However, sales through the digital channel are continuing to outpace prepandemic levels (around 17% of total sales, up 1,000 basis points relative to 2019), which we think illustrates consumers’ desire for convenience. We recognize that this could manifest in increased fulfillment costs for Target over time, though, compelling the retailer to expend resources to continuously enhance its omnichannel service offering. Although this top-line growth came with modest contraction at the operating margin line (down 20 basis points relative to the second quarter of fiscal 2020 to 9.8%) in the quarter, we attribute this degradation to higher merchandising and freight costs--factors that are eating into profits for firms across a vast array of industries.