As both Prime Day and Target Circle Week coincide, shoppers are presented with a plethora of bargains to choose from. The question, however, is whether they will prioritize purchasing items they want over those they truly need. While this may be beneficial for Target’s sales, which often lean towards the fun and non-essential, it poses a challenge for their profit margins. Consequently, the situation becomes a concern for Target stockholders.
The retailer has experienced a lackluster start to the year, with a decline in demand for discretionary goods. Consequently, a surge in sales could potentially help boost traffic and revitalize the company. Investors are hopeful that increased footfall will translate to improved performance for Target (ticker: TGT). However, this creates a Catch-22 scenario for the retailer. If Target can only attract customers with enticing deals, their margin targets might remain elusive.
Margin pressures have plagued Target for quite some time, and recent months have exacerbated this issue. Factors such as an increase in shoplifting incidents and the resumption of student loan payments have strained the budgets of Target’s core shoppers. While Target’s Circle Week event is a temporary solution, the growing trend of retailers resorting to margin-cutting discounts in order to drive sales could further hinder the company’s recovery.
Concerns about a potential margin miss in fiscal year 2023 are being raised by TD Cowen analyst Oliver Chen. As a result, he has downgraded his price target for Target shares from $200 to $166. Consensus estimates suggest that Target’s operating margins will expand to 4.9% this fiscal year, up from 3.5% the previous year. However, Chen’s own projections indicate that the company may fall short of this target, reaching only 4.7%. Additionally, his full-year earnings per share estimate of $7.83 is lower than the average analyst estimate of $8.25.
Chen highlights multiple factors that pose challenges to Target’s margin rebound. Consumers are prioritizing spending on experiences rather than material goods, which includes lower-margin essentials like food. The intense price competition evident during this week’s wide-ranging promotions from rivals such as Amazon.com (AMZN) and Walmart (WMT) serves as another obstacle for Target’s profit margins.
Overall, Target faces the delicate balancing act of attracting customers with enticing deals while striving to achieve their margin goals. The uncertain road to recovery necessitates strategic maneuvers, as the company navigates through a changing retail environment where wants and needs intersect.
Concerns and Downgrades Surround Target Stock
The future of Target’s stock is causing some concern among analysts. The average analyst price target on Target shares has dropped by $13 in the past year, reflecting a 9% decline in the stock’s value. While roughly half of the analysts remain bullish on Target, this is a decrease from the nearly two-thirds who held this view last July, and three-quarters in early 2022, according to data from FactSet. Earnings per share estimates for the current quarter and full year have also fallen over the past few months.
Citigroup recently downgraded Target, citing similar factors that have raised worries among others in the industry, such as tough competition. However, one analyst named Chen has maintained an Outperform rating on Target. Chen conveys optimism, believing that a healthier consumer and increased discretionary spending, coupled with cooling inflation, will allow the company to return to its pre-pandemic levels of success. This includes a five-year average comparable sales growth of 2% to 3% and an operating margin of 6.2%, which is higher than the current fiscal first quarter’s margin of 5.2%.
Chen highlights several key factors that contribute to Target’s potential for success. These include the company’s ability to adapt during the pandemic by offering drive-up and omnichannel options, as well as a loyalty program, digital advertising and marketplace strategies, and efficient delivery and supply chain capabilities. However, Chen acknowledges that investors may be more inclined to invest in defensive leaders like Walmart, which could impact Target’s valuation.
Despite these concerns, there are optimistic aspects to consider. The low expectations and valuation of Target’s stock present an opportunity for potential gains following a significant decline of over 20% in the past three months. Currently, the stock trades at just 14.5 times forward earnings, which is lower than its historical average of 17 times.
While Target may be facing challenges, the company continues to attract shoppers who are taking advantage of Circle Week deals. These customers may enjoy lower prices, but they are still willing to make purchases, indicating a positive sentiment towards the company’s offerings.