Shares of big-box retailer Target (NYSE:TGT) were under quite a bit of pressure following the release of some bleak results. Following Target’s quarterly crumble, Wall Street analysts have been lowering their price targets. BMO Capital downgraded the firm to “Hold” from “Buy” while reducing its price target to $165. That’s pretty much where the stock sits today. Indeed, many analysts don’t seem to see much value after Target’s latest flop.
Undoubtedly, the firm can point the finger at macro headwinds. Every firm has been weighed down by them these days. Still, Walmart’s (NYSE:WMT) impressive number shows that maybe it isn’t solely macro that’s to blame.
Going into the new year, we could see corporations move past inflation and supply-chain issues, only to encounter a weaker consumer. Despite the lowering tide, firms like Walmart may be able to make the most of the bad situation by taking market share in the scene.
Target’s Retail Mix May Not be Ideal for a Recession
With inflation likely to linger as the world tilts into an economic downturn, Walmart’s grocery mix is likely to help it hold its own. Those who go for the groceries are likely to stick around for those discretionary (nice-to-have) purchases as well. At writing, Walmart gets more than half (around 56%) of sales from grocery versus just 20% for Target. Indeed, not every consumer company is built the same. Target is more of a discretionary than Walmart, while Walmart is more of a staple.
Though Target may be less resilient in the face of a recession year, I do think recent downgrades are overdone. Target stock seems more or less fair-valued at this juncture.
There are challenges for Target with more of an uphill climb versus peers like Walmart. That said, the earnings bar has been lowered significantly following its latest quarterly flop.
Further, the company has been taking market share across a wide range of categories. A recession could take a step out of Target’s stride, but I don’t expect Target to have a target on its back (sorry for the pun) in the analyst community for very long. Therefore, I am bullish on TGT stock.
Target Stock Could be Far Quicker to Rebound Post-Recession
As we head into a recession, Target stock could continue to be outpaced by some of its grocery-heavy peers in Walmart. Once the tides turn and markets start thinking about the ensuing economic recovery, discretionary-heavy retailers could have more room to run from their lows. Target may have been punished for having a greater discretionary mix this time of year. However, once the consumer inevitably heals, the tides could turn heavily in favor of down-and-out retailers like Target.
Target is still a terrific manager that can continue taking share in key merchandising areas. Retail is a tough place to be, but Target has shown time and time again that it can hold its own and bring the fight to its rivals, big and small.
At writing, the stock trades at a mere 0.7 times sales, 22.9 times trailing earnings, and 12.4 times cash flow. Each metric is well below the retail (discount stores) industry averages of 1.3, 31.5, and 22.8 times, respectively.
In due time, I expect Target’s relative discount to diminish as management manages through what could be a hurricane of headwinds in 2023. With lower expectations, though, I suspect such headwinds won’t have as much of an effect as they would on one of Target’s pricier retail peers.
Is TGT Stock a Buy?
Turning to Wall Street, TGT stock has a Moderate Buy consensus rating based on 15 Buys and seven Holds assigned in the past three months. The average TGT stock price target is $174.55, implying an upside of 6.17%. Analyst price targets range from a low of $144 per share to a high of $206 per share.
Conclusion on Target Shares: Discretionary Isn’t Always a Bad Thing
Target has its work cut out for it as the recession that everyone fears finally sets in. Sure, discretionary sales will erode quicker in such an environment. However, I’d much rather pay a reasonable price for a well-run retail play like Target with a sub-optimal mix than pay up for a more defensive exposure in retail.