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Is Target a Compelling Story, Post Q3 Earnings?
Stock Analysis & Ideas

Is Target a Compelling Story, Post Q3 Earnings?

Target (TGT) is a general goods retailer in the United States. It sells a variety of products, including food, apparel, furniture, office supplies, and toys.

Target reported outstanding third-quarter earnings on November 17, with both the top and bottom lines of the firm continuing to improve. Revenues grew by 13.3% year-over-year, while adjusted profits per share improved by 8.6%. The quarter saw the great performance in both the physical and digital platforms.

To top it off, Target upped its holiday sales projection, citing early Christmas buying by Americans as a factor.

Despite strong earnings and bullish forecasts, the stock has lost around 5% of its value, closing at $253.80 on Wednesday.

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What Happened?

Target’s stock price appears to be weighed down by fears about margin pressures. The company’s gross margins fell 260 basis points to 28% in the third quarter. The decline was due to higher merchandise and freight costs. In addition, increasing labor costs at distribution sites exacerbated the problem.

It’s vital to realize that the pressure on gross margins isn’t going away anytime soon. During its Q3 conference call, the retailer warned investors that increased expenses might put more pressure on profits.

Not only Target is feeling the pain. Other retailers, such as Walmart (WMT), have also reported a margin hit as a result of rising supply chain expenses.

Now What?

Don’t be concerned.

Target has prioritized store renovations, digital capabilities, and same-day fulfillment possibilities, all while emphasizing speed and convenience.

Also, Target’s CEO, Brian Cornell, appears to be optimistic about the company’s future growth prospects.

Cornell said in Target’s Q3 conference call, “Following comp growth of nearly 21 percent a year ago, our third quarter comp increase of 12.7 percent was driven entirely by traffic, and reflects continued strength in our store sales, same-day digital fulfillment services and double-digit growth in all five of our core merchandising categories.”

Improved Website Traffic

Interestingly, we used TipRanks’ new Website Traffic tool, which gets its data from Semrush, to verify the company’s website traffic numbers (SEMR).

We discovered that unique user visits to Target’s website increased by 2.8% from September to October. Furthermore, this period was marked by rising stock values, which increased by 13.5%.

According to the statistics, Target’s business fundamentals remain intact and the firm continues to attract more visitors to its website, probably owing to high demand ahead of the Christmas season.

Expert Weighs In

In reaction to the company’s third-quarter earnings, Baird analyst Peter Benedict expressed his satisfaction with the performance. He thinks the company’s higher comparative sales and material operating expense leverage more than make up for its lower gross margin.

Despite the fact that the company’s weak margins have dragged on the stock price, he believes that the company’s efforts to secure inventory and provide value for customers are helping to fuel further market share growth.

As a result, Benedict maintained his Buy rating on Target and a price target of $285 (12.3% upside potential).

Wall Street Cautiously Optimistic

Turning to Wall Street, the analyst consensus is cautiously optimistic on Target, with a Moderate Buy consensus rating, based on 13 Buys and 5 Holds. As for the price target, the average Target price target of $285.63 implies 12.54% upside potential to current levels.

Disclosure: At the time of publication, Shalu Saraf did not have a position in any of the securities mentioned in this article.

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