Stock Analysis & Ideas

Don’t Go Bargain Hunting on Target Stock Quite Yet, Says Analyst

To say Target (TGT) investors had a rough Wednesday will be underselling the magnitude of the stock’s descent. TGT shares shed 25% in the session in what amounted to its worst day on the stock market since 1987’s Black Monday crash.

The descent was a reaction to the retailer’s woeful quarterly statement which managed to drag down with it other retail stocks after the company reported a big profitability miss.

Target dialed in adj. EPS of $2.19, some way below the $3.07 analysts had expected. The profitability flop was driven by a gross margin of 25.7% vs. the 30% exhibited a year ago.

According to the company, the culprits for the miss were freight-related cost increases, supply chain snags, an uptick in compensation and distribution centers’ growing headcount.

Further compounding matters, the company significantly reduced its 2022 EBIT outlook, now calling for an operating margin rate of roughly 6% – down from “8% or higher.”

The issues are not expected to abate anytime soon either. For the second quarter, the company is targeting an operating margin of roughly 5.3% (consensus expected 9.4%).

The company might have a list of challenging macro factors to contend with, but MKM analyst William Kirk thinks the problems run deeper, believing the difficult macro situation is “compounded by execution issues.”

“Consumers are softening, but they are also trading discretionary goods for discretionary experiences/services. Target is carrying too much discretionary goods inventory,” says Kirk. “With a consumer trading down and shifting away from discretionary goods, Target is facing the largest macro headwinds. An inventory glut magnifies these issues. Target now has more market share worth defending, but we anticipate a more aggressive competitor response in 2022, particularly as discretionary categories slow.”

Needling the company further, Kirk signs off by saying, “We prefer Walmart.”

Accordingly, Kirk remains on the sidelines with a Neutral rating and lowers his fair value estimate from $253 to $180. (To watch Kirk’s track record, click here)

Looking at the consensus breakdown, 7 other analysts join Kirk on the sidelines although with an additional 16 Buys, the stock claims a Moderate Buy consensus rating. Going by the $204.04 average target, the shares are expected to yield returns of ~31% over the one-year timeframe. (See TGT stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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