Attractive Target Shares Despite Near-Term Pressure | Catch My Job


A look at the Target Stock

  • Morningstar Present Fair Value Estimate: $167
  • Target Stock Star Rating: 3 Stars
  • Moat Economic Rating: None
  • Moat’s Tendency Scale: Negative

Target Earnings Update

Despite the low percentage drop from teenagers following disappointing third quarter earnings, our valuation of $167 per share should not change significantly, as we attribute the softness to near-term factors. As a result, our long-term outlook remains intact (mid-single-digit annual revenue growth, average high-single-digit operating profit forecast). We see an opportunity in the shares, as the general sentiment appears to be over-fixed on near-term woes.

Comparable sales rose 2.7%, close to our estimate, but sales trends declined as the quarter progressed, with the last two weeks of the period (end of October) particularly soft. Target expects a low single-digit percentage decline in fourth quarter sales. The sales environment is softening, intensifying consumer focus on promotions, and high levels of profitability led by lower theft, to an operating margin of 3.9% which trailed our estimate of 5%. Management is considering a wide range of margin results for the fourth quarter, centered around 3%, and our estimate of 6.5% should fall toward the new anchor point. A time value of money adjustment to our valuation should largely offset the impact of a softer near-term outlook.

The target saw sluggishness in its preferred categories, with sales in the home and hardline categories down at mid-single digit rates. In contrast, food and beverage rose at a low double-digit rate and beauty and home essentials categories were up at a low single-digit clip. We believe mix is ​​a significant reason why Target’s results have lagged behind those of wide-moat Walmart, which relies on fundamentals for a greater mix of sales. Around 60% of sales at Walmart’s US namesake stores come from food with a sharp focus on everyday value (especially important for cash-strapped consumers), while we believe around 40 % of Target’s sales come from non-discretionary categories. Encouragingly, Target saw unit market share gains in all of its marketing categories, suggesting its value proposition is resonating.


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