Stock Analysis & Ideas

Here’s Why Target Stock Lost More than 3% This Morning

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Target lost more than 3% in trading this morning after an earnings report that featured a narrow win and a big loss. The reasons behind that loss, however, may be smarter than some investors would think.

Retail season is shaping up to be an exciting one, and the latest figures out of retail giant Target (TGT) will help prove that one way or another. The news wasn’t great out of Target, as the company—up 4.57% in Tuesday’s trading—slipped more than 3% as of this writing on Wednesday. The company posted a significant miss on earnings. Analysts’ consensus looked for $0.79 per share out of Target. Target’s actual earnings? Just $0.39 per share.

Revenue was better, however, though only just. Estimates looked for $26.04 billion out of the company this quarter. That’s exactly what Target posted.

The last 12 months for Target shares were reasonably stable until May hit. Prices were canting downward overall; this time last year, Target shares were around $240, and by May, they were down around $210.

But on May 16, one major plunge took the company from around $210 to around $160 in one day. Recovery followed, but Target remains depressed around the $180 mark.

Target did not have a great quarter. With the holiday shopping season just a couple of months away, the company is likely looking for a win to emerge from there. The good news is that it has a fairly decent chance of doing so, and that’s one reason I’m bullish on Target.

Investor Sentiment Seems Cautiously Optimistic for TGT Stock

Target does seem fairly well-placed to survive an economic downturn like the one currently staring us in the collective face. Right now, Target has a 9 out of 10 Smart Score on TipRanks. That’s not only the second-highest level of “outperform,” but it’s also the second-highest score period. That suggests a very strong likelihood that Target will ultimately outperform the market. Insider trading at Target, meanwhile, suggests that agreement isn’t total but is coming around.

In the last three months, Target insiders staged two sell transactions and one buy transaction. Trading has been light, to say the least, and none of the three transactions were considered informative.

However, over the last 12 months, activity has been much briskier. It was still fairly balanced, though, between buyers and sellers. Insiders staged 57 sell transactions and 46 buy transactions. There has been clear sell-weighting over the last 12 months, but there’s also quite a bit of buying activity.

Target Stock Could Have an Edge Going into a Recession

It’s no secret that these are bad times for retailers. However, for some retailers, times will be worse than others. Generally, Target is considered a lower-end retailer. However, it offers slightly better quality goods for slightly higher prices than its nearest competitor Walmart (WMT). This is much of why people often refer to Target by the faux French pronunciation of “tar-jhay.” That perception will give it a leg up going into an economic downturn.

Certainly, Target will face many of the same problems that Walmart is facing right now. A supply glut, for example; all those container ships off the coast of California are finally making it into port and leaving stores with a lot of stuff they bought last year and now have to try and unload.

Worse, they’ve got to unload those products onto people who are a lot less likely to buy stuff in general. Unless, of course, that stuff is going into their bellies or their car’s gas tank.

However, they have one distinct advantage over Walmart; that slightly upscale edge. Middle-class shoppers, who not so long ago could afford better products, will not exactly enjoy getting bumped down to the Walmart league.

Target provides a softer landing for penny-pinching middle-class shoppers. It’s not quite Walmart. It may be close, but there’s a certain psychological comfort in being able to say, “At least I don’t have to buy everything at Walmart.”

Plus, there’s a matter of strategy to consider. Michael Fiddelke, the company’s Chief Financial Officer, pointed out that a lot of the earnings pain came as a result of Target trying to tackle its inventory problems immediately. The company, Fiddelke noted, worked to clear its decks as best as possible of the excess, so it could focus on the upcoming holiday shopping season.

This is actually a reasonable strategy; this time of year features very little in the way of gift-giving seasons. Only back-to-school shopping really factors in, and this is somewhat limited in scope to apparel and school supplies.

Thus, Target basically front-loaded its earnings pain so that it could walk into the next three months with a better position. Yes, there’s still a lot of lull going on in that quarter, so don’t look for success right away.

However, look for significant improvement once the November quarter hits. There’s already been substantial earnings pain for Target; it has already cut its profit projections twice in the last three months.

Now, Target has its decks cleared, and what is generally the biggest shopping season of the year is in front of it. It’s a safe bet that that season will already have a bit of pallor on it as inflation continues to run rampant.

Early projections suggest that spending will grow at a slower rate than inflation, and customers will be front-loading their spending to miss further inflationary price hits. Still, Target’s biggest season is likely ahead of it rather than behind.

Is TGT Stock a Buy or Sell?

Turning to Wall Street, TGT stock has a Moderate Buy consensus rating. That’s based on 19 Buys and nine Holds assigned in the past three months. The average TGT price target of $184.82 implies 6.2% upside potential. Analyst price targets range from a low of $150 per share to a high of $231 per share.

Conclusion: Target Stock Occupies a Lot of Walmart’s Ground

Target may not be the shopping platform of last resort, but it’s not that far away. In fact, that slight separation from being off the bottom might give it some edge going forward. Consumers can console themselves with the fact that they’re not yet doing all their shopping at Walmart. Yet they’ll still derive many of the benefits of bargain shopping in general.

Target has what looks like a good plan going forward. If the early projections come to pass and people bring forward their holiday shopping this year, that will put Target in a better position overall.

While Target isn’t in the best entry position overall—it’s trading closer to its average price target than its low—it’s still in a decent position to walk in. There is still upside to be had, though not as much as there once was.

Still, I’m bullish on Target. Hard economic times are already in place for many and are likely to continue for many more. That should give Target’s blend of lower costs and better quality an edge in the field that will let it survive right alongside Walmart.


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