• Target’s innovative product offerings and private-label success are overshadowed by declining discretionary sales due to increased competition and economic challenges.
• Recent performance shows a 0.3% sales rise, with digital growth up 11%, but in-store sales dropped 1.9%, highlighting industry-wide struggles.
• Weak consumer sentiment and economic uncertainty are expected to result in continued revenue weakness, particularly in discretionary categories like home furnishings and apparel.
• TGT’s weak holiday season guidance, with flat sales growth and adjusted EPS of $1.85 to $2.45, reflects ongoing margin pressures and softness in key areas.

Target (NYSE:TGT) has been an established player in the U.S. retail market since its inception in 1902, but recent trends in consumer behaviour and economic data have given me a reason to be bearish on the company for the

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Despite Accelerating Growth In Some Areas, I’m Bearish On Target appeared first on Up2info.com.

• I reiterate a buy rating on Target despite recent operational missteps and disappointing earnings, seeing it as undervalued with a compelling valuation gap compared to Walmart.
• Target’s Q3 earnings report was dismal, with significant misses on both top and bottom lines, leading to a 21% stock plunge and highlighting execution challenges.
• Key risks include ongoing execution issues, competition from Walmart, online retail threats, and weak Target Circle 360 numbers, but I expect better inventory management and sales rebounds in 2025.
• Technically, TGT faces resistance near $151 and support around $115, with a potential multi-year low of $103, indicating a challenging but potentially rewarding investment.

Retail has been a world of haves and have-nots in 2024. Shares of Walmart (WMT) are up 79% year to date (total return), while Target’s (NYSE:TGT) stock is down 4%. In between is the entire SPDR

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• I am downgrading Target from a “buy” to a “hold” and reducing the price target by 21% to $147 due to disappointing Q3 performance and muted Q4 guidance.
• Target’s Q3 saw deceleration in comparable sales growth and deteriorating margins due to higher inventory levels and promotional pressures, leading to underperformance against the S&P 500.
• Despite strong digital sales growth, Target’s overall revenue growth was strained by declining average selling prices and potential market share losses to competitors like Walmart and Costco.
• The potential impact of President-elect Donald Trump’s proposed tariffs on imports also adds uncertainty, likely raising consumer prices and dampening demand, further pressuring Target’s top and bottom lines.

Introduction and investment thesis

On September 23, I had initiated a “buy” rating on Target Corporation (NYSE:TGT) with a price target of $185.2.

I believed that Target was well positioned to smash the holiday season as its 1) comparable sales had turned positive, thanks to acceleration in its digital channels, 2) margins expanded from optimal category mix along with a prudent inventory position and 3) Target Circle loyalty program was well positioned to drive higher purchase frequency and order volumes from personalized offers.

Unfortunately, my bullish thesis was proven wrong with the company’s Q3 FY24 earnings report, with the stock underperforming the S&P 500 since the time of my previous publication.

In Q3, Target saw a deceleration in the pace of its comparable sales growth, as the promotional environment weighed down on ASP (Average selling price).

In the meantime, their gross and operating margins deteriorated from expanding inventory levels.

While the sales in its digital channels grew at an accelerating rate, the management’s muted Q4 revenue guidance is concerning, especially with strong holiday spending data from Adobe Analytics, which could be indicating potential market share losses.

Although Target is likely to enter a favorable comps environment in FY25 as per consensus estimates, I believe there is another big unknown- the impacts of President-elect Donald Trump’s proposed tariffs on imports to the US, which could raise overall inflation and dampen consumer demand.

Therefore, I have decided to downgrade my rating on the stock to a “hold”, while slashing my price target by 21% to $147, as the stock will likely be under pressure until it can demonstrate a reversing trend in its top and bottom lines.

Target’s discounting strategy failed to offset decline in ASPs, suggesting potential market share losses

Target reported its Q3 FY24 results where its revenue grew 1.0% YoY to $25.68B, while its comparable sales saw a sequential deceleration in the rate of growth to just 0.3% YoY, which significantly missed consensus estimates of 1.48% YoY growth, severely dampening investor sentiment.

On one hand, while its Digital Comparable sales grew at an accelerated rate of 10.8% YoY, its Store Comparable sales declined 1.9% YoY, bringing down the overall pace of comparable sales growth.

During the quarter, the company saw traffic grow a healthy 2.4%. However, this was offset by a decline in average ticket size of 2%. Despite Target’s strategy to deliver newness and value to drive a differentiated consumer experience, consumers continued to shop carefully amid stretched budgets. According to the management, “Consumers have become increasingly resourceful in their shopping behaviors, waiting to buy until the last moment of need, focusing on deals, and then stocking up when they find them.”

As a result, the company is seeing a stronger response to promotions, as customers are generally more willing to spend when they find the right balance of on-trend newness at compelling price points. Compared to a year ago, Target’s promotional markdown rates have increased around 100 basis points.

In my previous post, I had discussed that discounting was one of the strategies Target has been using to boost traffic. Unfortunately, the volume of traffic is not sufficient enough to offset the decline in ASPs, which is straining overall revenue growth. While certain categories such as Beauty, Food & Beverage, and Essentials are seeing above-average comparable sales growth, given the company’s initiatives to drive newness and value through greater assortment, their Homes and Hardlines categories continued to remain under pressure.

Last month, Stifel analyst Mark Astrachan had put out a note where he pointed to Target’s underperformance compared to its larger peers, such as Walmart (WMT) and Costco (COST), indicating potential market share losses, while Morgan Stanley noted that Amazon (AMZN), Walmart and Costco are taking 50% of incremental retail sales and more than 75% of incremental e-commerce sales, which means that the rest of the mall retailers and e-commerce players are scrapping for the leftovers.

Higher inventory levels squeezed Q3 profit margins

In terms of profitability, Target reported non-GAAP EPS (earnings per share) of $1.85, which also failed to meet consensus estimates of $2.30. On a YoY basis, its EPS grew 1.06%, in line with revenue growth.

However, both its gross and operating margins shrunk 20 and 60 basis points respectively from increasing costs from digital fulfillment and supply chain costs due to higher inventory levels, along with a slowdown in their highest margin discretionary categories, such as Home and Apparel. At the same time, their SG&A expense rate also expanded by 50 basis points as revenue came near the low end of their expected range.

On the topic of inventory levels, the company saw a 3% YoY increase in the level of their inventory, which grew at a faster rate than overall revenue growth. If inventory levels grow faster than overall sales growth, it usually translates to higher cost pressures, like we saw in Q3, along with deeper discounting, which could dampen both ASPs and margins in the process.

During the earnings call, the management attributed the reason behind the increase in their inventory levels to challenges that they faced due to the East Coast and Gulf port strikes, which affected the timing of certain shipments and receipt timing. Coupled with the impact of softer-than-expected sales in certain discretionary categories, this led to a higher inventory level earlier than in a typical year.

Management’s muted Q4 guidance is concerning amid strong holiday spending data

In my previous post, I had pointed to the company’s a) improving comparable sales, b) strong operating rigor with prudent inventory position, and 3) digital momentum in Q2 to be responsible for the company smashing sales in the holiday season.

While Q3 turned out to be a disappointment on the comparable sales and operating rigor front, I believe the company continued to demonstrate strong momentum in its digital channel grew over 10%, with 20% growth in their same-day delivery powered by Target Circle 360, along with double-digit growth in Drive Up. Meanwhile, it enrolled 3M new Target Circle loyalty members in Q3, which is faster than its Q2 rate, empowering the organization to not only drive profitable sales growth but also gain deep customer insights to extend more personalized offers to drive purchase frequency and order volumes.

In the meantime, the company is also focused on delivering the “perfect balance of value, newness, ease, and inspiration” as part of their holiday season plans. What I will note however is that heavy discounting remains a central strategy during the holiday seasons to boost traffic growth during the earnings season.

Unfortunately, the management struck a cautious tone when it came to their Q4 revenue guidance, where they expect ongoing weakness in discretionary categories while projecting flat year-over-year comparable sales growth.

So far, according to Adobe Analytics, holiday shopping is already off to a strong start, with spending reaching a record $6.1B on Thanksgiving, $10.8B on Black Friday, and $13.3B on Cyber Monday, representing a growth rate of 9%, 10.2% and 7.2% YoY respectively, with a total of $131.5B that has already been spent by Americans starting from November 1.

With online retail spending expected to reach $240.8B, it will represent a growth rate of 8.6% YoY along with widespread discounting across several categories. With data suggesting that consumers are spending at a higher rate across apparel, bedding and furniture, groceries, and cosmetics, it is disappointing that Target management anticipates flat year-over-year comparable sales growth, with pessimism in certain discretionary categories.

Target remains committed to its long-term strategy, but there is a big unknown

Finally, despite facing pressures on both the top and bottom lines, the management remains confident in their long-term strategy, where they are investing in their existing and new stores while bolstering their digital experiences and improving the overall efficiencies in their fulfillment capabilities. At the same time, they continue to expand their brand portfolio to gain higher control over quality and costs.

Meanwhile, Target is also going to enter a more favorable comps environment in FY25, as can be seen below. The stock is trading at a 20% discount to its 5-year forward price-to-earnings ratio given the depressed investor sentiment from top and bottom-line weakness, along with lowered forward guidance.

However, in all of this, there remains a big unknown, which is the impact of President-elect Donald Trump’s proposed tariffs on imports to the US, which will likely put upward pressure on consumer prices for clothing, toys, furniture, and more, thus likely dampening overall demand.

With Goldman Sachs estimating the effect of tariffs to raise Core PCE by 0.3-0.4 pp next year, leaving it at 2.4% by December 2025, Americans could lose between $46B and $78B in spending power each year, or $362-$624 per household.

While US retailers will likely transfer a substantial portion of the price increases over to the consumer, the impact on the top and bottom line is unknown, as the demand environment is hard to predict.

Reducing my price target by 21% to $147

With the management anticipating flat Q4 comparable sales while reducing their FY24 EPS guidance from their previous range of $9.00-9.70 to their present target of $8.30-8.90, the company has received a slew of forward revenue and EPS downgrades as can be seen below.

In this valuation model, I will take consensus revenue estimates into account, which call for a decline of 1.45% YoY in FY24, followed by growth in the low single digits after that. Note, that these growth estimates are lower than its larger peers of Walmart and Costco, which is discouraging in my opinion, as it points to market share losses.

From a profitability standpoint, I will take the management’s FY24 estimates of non-GAAP EPS into account, followed by consensus estimates that call for a total non-GAAP EPS of $10.07 by FY26, growing at a faster rate than overall revenue growth. This will be equivalent to a present value of $8.63 when discounted at 8%.

Assigning it a price-to-earnings multiple of 17, which is the average multiple of the S&P 500, where its companies grow their earnings on average by 8% over a 10-year period, it translates to a price target of $146.8, which represents an upside of 11% from its current levels.

My final verdict and conclusions

Although I had initiated a “buy” rating on Target stock in September, I will unfortunately have to downgrade the stock to a “hold”, while reducing my price target by 21% to $147 at this time, after taking a hard look at things.

In Q3, the company failed to deliver on the accelerating trend in comparable sales growth, while suffering from a deterioration in its operating metrics with the expansion in inventory levels. With promotional activity weighing down on ASPs, the company may continue to suffer from margin pressures. At the same time, its muted Q4 guidance points to potential market share losses to its larger peers in the retail industry. Plus, there is the added unknown of how tariffs will impact retailers’ top and bottom lines.

As a result, I believe it will be prudent for investors to stay on the sidelines, as the stock does not offer a compelling risk-reward to initiate a position.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Target Corporation’s weak guidance for the holiday season and softness in discretionary categories lead me to initiate a “Sell” rating with a fair value of $112 per share.
• Despite 10.8% growth in digital sales, Target’s physical stores face challenges, with a 1.9% decline in comparable sales.
• Internal issues like SKU optimization and supply chain management, along with high competition, contribute to Target’s underperformance compared to Walmart.
• Weak consumer sentiment and supply chain cost pressures are expected to impact Target’s near-term growth, justifying my “Sell” rating.

Target Corporation (NYSE:TGT) released their Q3 result on November 20^th, providing weak guidance for the holiday season due to softness in discretionary categories. While Target has been growing their digital channel with 10.8% comparable sales growth (SSS) during the quarter, their physical stores continue to face growth challenges. I am initiating with a “Sell” rating with a fair value of $112 per share.

Softness in Discretionary Categories

After years of business transitions, Target has increased its sales exposure to beauty, household essentials and food/beverages, as shown in the chart below. In the current high-interest rate environment, I think consumers are cutting their spending on discretionary categories, such as beauty and home furnishing products. As indicated in Home Depot’s (HD) recent earnings call, they continued to see softness in larger discretionary projects where customers typically use financing to fund the project. As such, I am not surprised with Target’s weakness in the discretionary categories such as home furnishing and décor products. During the Q3 earnings call, the management noted continued soft demand in apparel, home, and hardlines categories.

As depicted in the chart below, Target delivered 10.8% comparable sales growth in digital channel but experienced a 1.9% decline in its physical store channel. It is evident that Target has been struggling with their physical store sales growth in recent quarters.

To further analyze their comparable sales growth, I broke down the growth into the number of transactions and the average transaction amount, as illustrated in the chart below. Due to the weak consumer sentiment, Target experienced a structural decline in the average transaction amount, indicating that consumers are cutting their spending that promotional activities are increasing in the retail market. During the earnings call, Target’s management anticipated heightened promotional activity throughout the year, particularly during the holiday season. I believe a highly promotional retailer market reflects a weak consumer demand, especially in the discretionary categories.

Other Internal Issues

While weak consumer sentiment has presented tremendous growth challenges for Target, I believe Target also faces internal issues related to SKU optimization, supply chain management, online channel and operational efficiencies.

As shown in the chart below, Target has been consistently underperformed Walmart in comparable sales growth. Please note that I aligned Walmart’s quarterly end period with Target’s for comparison purposes. Walmart has been successfully grown its e-commerce channel, delivering 43% year-over-year growth with 290bps contribution to the US comparable sales growth in the recent quarter. Comparably, Target’s digital channel only grew by 1.5% in FY22, followed by 4.8% decline in FY23. Walmart also noted strong performance in the food category in Q3 FY25 with unit volumes growing by their highest level in four years.

In addition, I think Target has struggled with their SKU management, offering too many categories vulnerable to other competition from e-commerce players like Amazon (AMZN). Although Target has increased their exposure to food and beverage recently, the category still represents only 23% of total sales.

Outlook and Valuation

Target is guiding for flat comparable sales growth for Q4, with adjusted EPS of $1.85 to $2.45, a pretty weak guidance, in my view. The weak margin guidance reflects supply chain-related cost pressures stemming from East Coast and Gulf port strikes, as noted during the earnings call.

For their near-term growth, I am considering the following factors:

• Store channel represents more than 80% of total revenue. Amid the high interest rates environment, I expect continued weakness in discretionary categories. Based on historical growth rates, I anticipate store originated comparable sales growth of around 1%, comprising 0.5% transaction growth and 0.5% average transaction amount growth.
• Target has focus on their digital channel recently, launching programs like Circle 360 and same-day delivery services. I believe their digital channel will grow at a high-single-digit rate in the near future, as ship-to-home business is gaining popularity among customers.
• Combining physical and digital channels, I estimate the same store sales will grow by 2.6% annually, driven by 1% physical store sales growth and 8% digital channel growth.
• With 1,956 stores in operation, I anticipate the new stores will contribute an additional 1% growth to the overall topline, aligned with their historical average.
• I forecast 10bps annual margin expansion, driven by the revenue mix shifting to digital channel. I calculate that the total operating expenses will grow by 3.5% annually, leading to 6.1% of operating margin by FY33.
• I calculate the WACC to be 9.4% assuming: risk-free rate 3.8%; beta 0.92; equity risk premium 7%; equity balance $71 billion; Debt $11 billion; tax rate 22%.

The DCF can be summarized as follows:

Discounting all the future FCF, the fair value is calculated to be $112 per share, as per my estimates.

Upside Risks

As I assign a “Sell” rating on Target, I am considering the following potential catalysts for stock upside:

• Target repurchased $7.1 billion of own stocks in FY21 and $2.6 billion in FY22 but did not repurchase any in FY23. Year-to-date, the company has repurchased $506 million of own stocks. As noted in the earnings call, the management expected to repurchase more in Q4, which could support the stock price.
• Target has been making significant investments in their digital business, with strong growth in its ship-to-home segment in recent quarters. The strong digital channel could contribute to an accelerating comparable sales growth, which could be favored by the market. Based on my sensitivity analysis for the DCF model, a 1% increase in comparable sale growth could add nearly 10% to the stock price.
• As the Fed has begun to cut interest rates, consumer sentiment could potentially recover faster than expected. If that is the case, Target might experience a strong recovery in discretionary categories, accelerating Target’s comparable sales growth.

Conclusion

I think the current stock price has not fully reflected the weak growth in discretionary categories and near-term margin pressures. Therefore, I recommend investors avoid Target stock at this time. I am initiating with a “Sell” rating with a fair value of $112 per share.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Target: Softness In Discretionary Categories; Initiate With ‘Sell’ appeared first on Up2info.com.

• Target missed the mark in Q3, reporting results well below expectations.
• Sour investors sent shares in the stock plummeting over 20% during Wednesday’s trading hours.
• While consumers appreciated Target’s price promotions, investors were clearly more critical.
• At new 52-week lows, I continue to view shares in Target as best left on hold.

Shares in Target (NYSE:TGT) dropped to a new 52-week low on Wednesday after badly missing Q3 expectations. The sour sentiment contrasts sharply with discount retailers, such as Walmart (WMT) and Costco (COST), both of which continue to reap the gains of cautious consumer spending.

In my last coverage on TGT, I previewed the company’s Q2 results and elaborated on my expectations for an inflection in sales growth. A key aspect of my preview was consideration to the impact of TGT’s recent price reductions on 1,500 of TGT’s frequently shopped items, as well as the impact of additional price cuts on more items through the summer.

Consumers appreciated the price reductions; investors, however, not so much. This was the main takeaway from TGT’s Q3 results. Following the release, my position on TGT remains unchanged. I continue to view shares as best left on “hold.”

TGT Q3 Results Recap

Target’s Q3 results landed well below expectations. In prior guidance, the management team guided for comparable sales growth of between flat to 2%. Actual comparable sales growth was just 0.3%. In comparison, Walmart reported U.S. comparable sales growth of 5.3% yesterday in its most recent quarterly report.

TGT CEO, Brian Cornell, highlighted positive traffic trends in his earnings commentary. But there was no sugarcoating the impact of the more promotional environment on both the topline and bottom line. While customers were certainly more engaged with TGT during the quarter, they weren’t necessarily spending more money.

Continued softness in the discretionary categories continues to be TGT’s sore spot. Unlike Walmart, which derives the majority of its U.S. sales from groceries, TGT’s bread and butter is in the discretionary categories. In previous estimates, the management team had noted that the promotional environment would prop up the topline. However, the reality was very different during the quarter.

TGT reported continuing strength in its beauty category, where comparable sales rose 6%. But this was offset by softness in the home and hardline categories, as consumers continue to hold back spending on these larger ticket items.

The promotional environment negatively impacted margins, as did cost pressures in health care and general liability expenses. This contributed to a gross margin rate that was 20 basis points lower YOY and an operating margin rate that was 60 basis points lower YOY. This also came as selling & administrative costs increased by about 50 basis points.

Overall earnings landed at just $1.85/share, $0.45/share lower than estimates and below its previously provided target. While some of this was due to an unexpected hit from the port strike, much of this was from TGT’s own doing, including its rosier forecast provided earlier in the year and a promotional sales mark that failed to live up to expectations.

Market Reaction To TGT Results

Weak comparable sales growth and disappointing earnings weighed heavily on investor sentiment. Adding to the negativity was a sharp reversal in the company’s forward outlook.

In the hours following the earnings release, shares tumbled roughly 18%, marking their steepest single-day drop since mid-2022. At that time, investors punished the stock with a 25% decline following a dismal Q2 FY22 earnings report.

While the current declines were not as severe, they were still significant. By the close of trading, the stock had shed approximately 20%, hitting new 52-week lows in the process.

What Is The Outlook For TGT Stock?

Looking ahead to the holiday quarter, TGT’s outlook appears lackluster. Current forecasts project flat quarterly comparable sales at best. Similarly, bottom-line estimates have been revised downward, leading to a reduced full-year midpoint.

This subdued outlook reflects continuing weakness in discretionary categories. Additionally, the shorter holiday shopping season featuring five fewer days between Thanksgiving and Christmas contributes further to the cautious expectations. Earnings commentary attributed approximately a one-percentage-point headwind to Q4 comparable sales due to the condensed calendar.

In my view, ongoing cost pressures and a heavily promotional retail environment are likely to remain headwinds for TGT throughout the holiday season. However, the current negative sentiment surrounding the stock positions it for potential upside in the next earnings report, should results surpass these tempered expectations.

Is TGT Stock A Buy, Sell, Or Hold?

Prior to the earnings selloff, sentiment around TGT remained bullish throughout the year. Both the Seeking Alpha analyst community and its quants rated the stock as a “buy,” with the latter highlighting TGT’s strong profitability metrics. However, TGT’s Q3 results fell short on multiple fronts.

While TGT reported positive traffic and volume trends, these gains were fully offset by declining prices. While customers responded well to promotional efforts, this came at the expense of profitability, disappointing investors. Additionally, cost pressures related to healthcare and general liability expenses further weighed on performance, contributing to lower gross margins and earnings that fell significantly below expectations.

Earnings commentary hinted at some improvement in the discretionary category in October, but TGT continues to face challenges in attracting price-sensitive customers who continue to favor discount retailers like Walmart and Costco.

TGT revised its full-year EPS guidance to a midpoint of $8.60/share, down from the prior $9.35/share. This represents a notable reversal from the earlier upward revisions made earlier this year.

Following the selloff, TGT shares trade at a forward multiple of approximately 14x. This may appear attractive compared to Walmart’s premium of over 30x and Costco’s even higher multiple. Historically, TGT has averaged a 19x multiple over the past five years, suggesting the stock is currently about 13% undervalued. However, TGT’s ongoing operational challenges, including cost pressures and headwinds in its discretionary categories, appear to justify the lower multiple.

I maintain my “hold” rating on TGT shares. Significant improvement in the discretionary category, combined with stable traffic trends and a reduction in promotional activity, would motivate me to reassess. Until then, I would continue to view TGT as a stock better left on the sidelines.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Target: Q3, Promotional Environment Weighs On Earnings appeared first on Up2info.com.

• Target’s earnings miss and guide-down were driven by changing consumer demand for discretionary goods and proactive supply chain adjustments due to a port strike.
• The stock’s drop is overdone, with a revised fair value of $144, making Target a Buy at the current price of $122.
• Target’s valuation is attractive compared to Walmart, with similar return on capital and only slightly lower growth.
• Future consumer sentiment and spending patterns, along with continued cost management, are key to Target’s margin recovery and earnings growth.

It’s Not About Being “Woke”

Target Corp. (NYSE:TGT) shocked investors with a massive earnings miss and guide-down in their Q3 2024 earnings release. The retailer earned $1.85 per share in the quarter and guided to a range of $8.30 – $8.90 per share for the year. These numbers came in far below consensus estimates of $2.30 and $9.52 per share. The stock dropped over 20% on earnings day, the worst drop since Q1 2022 results were announced. This leaves the share price below pre-pandemic levels of 5 years ago and more than 50% below peak levels reached in 2021.

Many commenters on Seeking Alpha news articles went right to the political explanation of Target being excessively “woke”, or concerned about specific demographic sub-groups while alienating the larger customer base. It’s rarely a good idea to base investing decisions on politics, especially if it prevents digging deeper to find other reasons. It is true that Target has catered to identity groups for the last several years, and they still have a “New & Featured” menu on their home page featuring several such groups.

Nevertheless, as I pointed out in my last article in March, Target has evolved their messaging in the last year or so to be more inclusive of all customers. This included dialing back displays of rainbow themed merchandise in June 2023 following customer complaints.

Target’s same store sales growth bottomed in mid-2023 at around -5% and has gotten back to positive in the last two quarters. So, it is hard to blame an issue that reached peak visibility a year and a half ago for the current results. Instead, Target’s current problems are similar to the ones that caused the last big drop in the share price in 2022: changing consumer demand and overstocking of inventory. Costs also come into play this quarter, impacting operating margins.

Changing Consumer Demand

Following years of higher inflation, consumers have dialed back their appetite for discretionary goods. While there has been a slight improvement since June, consumer intent to spend on discretionary items is deeply negative compared to where it was at the end of 2021.

This is especially pronounced in the clothing and apparel category, an important one for Target. Even after high inflation, the post-pandemic trend continues where consumers spend more on travel and leisure while cutting back on goods. Target also experienced lower sales in the home and hardline categories. The concentration in discretionary categories differentiates Target from Walmart (WMT) which is much more dependent on non-discretionary categories like groceries.

When they do spend, consumers are more likely to wait for discounts. As stated by CEO Brian Cornell on the earnings call,

Consumers tell us their budgets remain stretched and they’re shopping carefully, as they work to overcome the cumulative impact of multiple years of price inflation. They’re becoming increasingly resourceful in their shopping behaviors, waiting to buy until the last moment of need, focusing on deals, and then stocking up when they find them. As a result, we’re seeing a stronger response to promotions than we’ve seen in some time.

Reinforcing this theme, management also noted that during the recent Target Circle Week promotion, sales were lower than usual in the week before and the week after.

Looking forward, the next few months will be critical to understand where the consumer is headed. Does the less negative intent to spend on discretionary goods mark a bottom, or just a fluctuation within the range it has been in over the last couple of years? The consumer sentiment survey by the Conference Board shows a similar trend, however underlying metrics like future expectations show clearer signs of improvement. It’s possible that the elections created a sense of uncertainty, and sentiment may improve now that a clear result is known, even if not everyone is pleased with the outcome. We will get more information when the next consumer sentiment survey results are released on 11/26.

Inventory And Cost Management

The port workers’ strike on the US east coast created a risk that Target had to manage in the quarter. While work resumed after a few days, Target had to be prepared for an extended strike which could have caused stock-outs. The company proactively ordered some merchandise early and shipped it through the West Coast ports, which settled their union contract in 2023. This added to supply chain costs, but should be a one-off issue and not an ongoing hit to margins. Target expects to clear out the excess inventory in 4Q and get back to normal operating levels for 2025.

Nevertheless, the operating margin in 3Q was just 4.6%, down from 5.2% last year. Gross margin was down 20 basis points. The negative hit to gross margin was supply chain costs, which were 90 basis points higher, driven largely by the port strike issue, but also the mix impact from higher digital vs. in-store sales. Offsetting this was 20 basis points lower merchandising costs and 50 basis points of reduced shrink, an encouraging sign following years of increasing shrink losses. Selling, general, and administrative costs were 50 basis points higher. Much of this was due to higher general liability and health insurance costs.

It is hard to blame Target for erring on the side of making sure inventory is in stock and being proactive around the port strike. Looking forward, I expect the company to recapture a lot of the 90 basis point hit as the supply chain normalizes. I also expect continued progress in reducing shrink, Finally, if consumer spending patterns shift back toward higher margin discretionary goods, Target will see a margin improvement from product mix. While I am not projecting a return to 6% operating margins in 2025, I think they can get there in the longer term.

One risk to this outlook is a resumption of the port strike, which is only on hold until January 15 as the union and management try to settle a contract. Another risk is the possibility of tariffs under the new administration. It is still too early to predict the level of these tariffs, what products they will apply to, and how much can be passed along to the consumer.

Earnings Model Update

Target is expected to have flat same store sales this year, however the absence of a 53rd week in this fiscal year results in a forecast of lower total sales. Gross margins for the year should be slightly higher, but SG&A and depreciation are also forecasted higher, resulting in a forecasted operating margin of 5.3%. Interest expenses are down due to lower debt, but the tax rate is up slightly to 22.5%. The resulting net income is down about 1% from 2023. The company has bought back $500 million worth of shares, in line with my prior expectation. With the lower share count, EPS is projected to be $8.90, at the high end of company guidance.

Looking forward to 2025, I am projecting 2% same store sales growth and 2.7% total sales growth. I am projecting similar gross margins to this year, 2.5% growth in SG&A, and 2% growth in depreciation. Interest expense and tax rate will be similar to 2024. Finally, share count is reduced by 8 million shares as I am projecting a $1 billion buyback. The resulting EPS projection for 2025 is $9.45, which is 6.2% growth from 2024.

Valuation And Capital Management

At $122, Target is valued at 13.7 times 2024 earnings. This is now cheaper than the long-term average around 15. Target’s P/E is now barely 1/3 that of Walmart.

While it has pulled back since the high-earning years during the pandemic, Target’s return on total capital is close to that of Walmart, around 12%.

Looking at consensus estimates, both retailers have 9 years’ worth of forward EPS estimates on Seeking Alpha’s Earnings Estimates page. Using those values, Target has an EPS CAGR of 7.6% per year, while Walmart has an EPS CAGR of 8.6%.

Target’s valuation looks cheap compared to Walmart, given just slightly lower growth and similar return on capital. Using my 2.0 PEG ratio limit, Target’s fair P/E is 15.2, so current fair value is $135 and the 1-year price target is $144. The drop in share price after earnings therefore looks overdone.

Target’s YTD free cash flow was $2.1 billion. This was an improvement over the $1.4 billion in the first 9 months of 2023. Capex was about $2 billion lower this year, offset by around $1.3 billion more working capital build. The $2.1 billion of FCF was used to pay $1.5 billion in dividends and $0.6 billion of share buybacks. The company also drew about $0.4 billion of its cash balance to pay off debt. In 4Q, Target should have its seasonally highest FCF of the year, around $2 billion. The retailer is planning additional capex of $1 billion and the quarterly dividend of $0.5 billion.

Looking ahead to 2025, Target is planning higher capex of $4 – $5 billion. With operating cash flow up slightly, I am projecting $2.8 billion FCF next year. That will support about $2.1 billion of dividends and about $0.7 billion worth of buybacks. Target also has about $1.6 billion of debt due in the next year, which I expect they will refinance.

$2.1 billion of dividends and an average share count of 456 million works out to $4.60 per share for 2025, or $1.15 quarterly, a small increase of 2.6% from this year. At $122, the forward yield is attractive at 3.8%.

Conclusion

Target’s big miss and guide-down with 3Q results was a shock to the market, but investors should avoid using a political lens to analyze the results. The real driver looks like consumers slowing down their purchases of the discretionary goods that make up a bigger part of Target’s sales compared to Walmart. Also, Target proactively adjusted its supply chain to deal with impacts from the East Coast port strike. While the strike lasted only a few days, the company avoided stock-outs that could have happened if the strike lasted longer. These added supply chain costs should not recur in the future, and Target is also making progress reducing the cost of shrink, helping offset growing costs in other areas such as insurance. Consumer preferences aren’t permanent, either, and a boost in sentiment from the resolution to the elections could give shoppers an excuse to pick up their spending again.

My earnings estimate and fair value are revised down compared to my last article in March, but the market reaction to the 3Q results was even more severe. With the market price of $122 below my 1-year target price of $144, Target stock is now a Buy.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TGT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Target: Wake Up To The Real Issues (Rating Upgrade) appeared first on Up2info.com.

• Analysts are optimistic about Target, expecting $26B in revenue and a 9.5% YoY EPS growth, despite mixed top-line revisions.
• Target faced challenges with shrinkage, but recent efforts have shown improvement, contributing to a $500M efficiency gain.
• FY 2023 results were strong with a 50% YoY EPS increase and higher operating margins, though comparable sales were declining.
• In this article, let’s take a look at the upcoming earnings report to see what we can expect.

Target Q3 Earnings

The general consensus on Target’s earnings seems positive. Revenue should be close to $26B, a 2% YoY growth, while EPS of $2.30 should be 9.5% above last year’s Q3. Overall, analysts expect improved profitability. In fact, we have 27 upward EPS revisions versus only four downward revisions, while on Target’s top-line analysts are more uncertain with 13 upward revisions and 17 downward revisions.

After all, positive news is coming in. At the end of 2022, Target (NYSE:TGT) issued a big warning on shoplifting and investors punished the company’s lower margins. Target talked about a $500M dent in its profits. At that time, it seemed big retailers were unable to fight off this new wave of crime. The only retailer that seemed able to fight off this epidemic was Costco (COST), due to its unique business model. Some stores in major cities were shut down, security was hired, and high-ticket merchandise was locked up more frequently. Then, in August, as Target held its Q2 earnings call, it started talking about a new story: shrink was barely perceivable, and the company said it was making good progress to keep it under control.

After all, things started going well for Target in late 2023, and the company’s FY 2023 results were outstanding, with FY EPS 50% higher YoY and the operating margin being 2% higher YoY. However, while profitability improved, Target’s comparable sales were still declining. So, the main driver of the positive results was a $500M improvement in efficiencies.

Back then, Target said it expected FY2024 to show a “modest increase in comparable sales in a range from flat to two percent. GAAP EPS and Adjusted EPS are both expected to range from $8.60 to $9.60”.

Let’s look at what Target has achieved so far and what we could expect from Target’s upcoming Q3 earnings report.

So far, in Q1 Target reported -3.7% comp sales, and -4.8% in-store comp sales. EPS kept doing well and came in at $2.03, close to the high end of the guidance range ($1.70-$2.10). In Q2, Target’s comparable sales finally increased 2% YoY, with store comp sales up 0.7% YoY. EPS increased 40% YoY to $2.57. No wonder the company announced “it was back to sales growth” driven entirely by traffic. As a result, the Q2 operating margin was 6.4%, up 160 bps YoY. Surely, the 8.7% growth in digital comparable sales helped Target’s results. But also discretionary categories such as apparel reported a nice 3% growth. As positive as this may be, these results confirm my view on Target: although it enjoys strong brand recognition, it presents some vulnerability to economic downturns since its sales mix is more sensible to discretionary items than Walmart’s (WMT). In fact, among its main categories, we find apparel and home goods, which are discretionary. Moreover, it is in no way close to having a solid stream of high-margin revenue such as Costco does with its membership.

And here we are with the upcoming Q3. Three months ago, Target guided for a flat to 2% increase in comparable sales, with EPS that should be between $2.10 and $2.40. As we can see, the current consensus leans toward the high end of this range. The FY guidance remains a 0%-2% increase in sales, even though Target believes the overall result will “more likely be in the lower half of the range”. However, Target’s EPS should be in the range between $9.00 and $9.70, up from the expected range announced in March. So, we are going to see a company truly focused on getting rid of excess costs to improve its profitability in an environment where it is difficult to significantly grow the top line. To Target’s credit, this result is particularly good because since the start of this year, the company has been lowering prices on thousands of items, and with the last announcement of a price cut on over 2,000 items, Target believes that by year-end it will have lowered prices on more than 10,000 items. If EPS keeps improving, the company is truly focused on efficiency.

Target’s EPS is also growing nicely thanks to its share repurchases. Just in Q2, it bought back $155M of its shares, decreasing the share count by 1.1M.

By the way, right after Q3, we will start looking ahead to Target’s Q4 results which are traditionally a big quarter due to Christmas holiday spending. On Black Friday, Target will release unique Taylor Swift merchandise (the Eras Tour book, an anthology album on vinyl) that will drive more traffic that could offset a rather short shopping season with only 26 days between Thanksgiving and Christmas.

Valuation

Target’s current valuation is interesting: a 16 fwd PE is not demanding and a 9.8 as the fwd P/FCF ratio seems cheap, too. One of its main competitors, Walmart trades at a fwd PE of 34 and a P/FCF above 20. Costco is even more expensive. So, there is a big gap between Target and the rest of the industry. While I would not consider Costco the right comparison, I think the discount to Walmart’s valuation has become too wide. But this might mean that Walmart’s multiples will contract a bit, rather than driving a multiple expansion for Target.

However, Target has become a very interesting pick for dividend-seeking investors. Its payout ratio is 45%, which is very sustainable. Its forward dividend yield is close to 3%, and its 5-year dividend growth rate is 11.4%, even though this year Target increased its dividend by only 1.9%.

I don’t want to pull the trigger and buy Target. This is because I don’t think its business is well protected from stiff competition and pricing wars. Moreover, while I think Target’s stores offer a pleasant shopping experience, it relies more on discretionary item sales and this makes its earnings a bit more unpredictable than I would like. In addition, I usually hold good companies in my portfolio whose revenue growth is above 10%. Target doesn’t meet this criteria, yet. Nonetheless, its ability to quickly recover its margins and its profile as a reliable dividend payer might make it an interesting pick for some. In this case, I would not worry about the upcoming quarter. The chances that the report will be good are high, and I wouldn’t expect too much volatility in the share price or daily volume.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Target Q3 Earnings Preview: From $500M Loss To 40% EPS Growth appeared first on Up2info.com.

• TGT makes the grade for me within my 30-stock portfolio. WMT does not.
• TGT’s solid combination of yield, valuation, and stability is favored compared to WMT’s excessive valuation and very low dividend yield.
• This article reviews in detail the metrics (proprietary and otherwise) I use for all YARP stock analysis.

Earnings season has been a blast, eh? I’m just kidding. It is my least favorite season. And I have to deal with it four times every year. It’s not that I don’t want to hear from the companies whose stocks I own. But I recall a time, a couple of decades ago, when quarterly earnings were more of a polite, measured assessment of a company’s long-term progress. Now, they are an event, with financial TV counting down the seconds until announcements from certain high-profile stocks.

This gamification of earnings reports simply adds a lot of wasted emotion to the long-term investing process. Because the more interest in the stock market increases, the more that all companies end up in the crosshairs of “investors” who really are speculators, given the number of double-digit percentage price changes I see every quarter, even after reports from very staid businesses.

The whole expectations game by brokerage analysts just feeds the frenzy. But frankly, it is no one’s fault. It is the market doing what it does in this age of 24/7 information, social media influences and the willingness of the market at large to reward stocks that were supposed to earn $5 a share, see estimates drop to $4 a share, come in at $4.02 a share and see the stock rally. Or the opposite, simply because someone saw something they didn’t like, and can move the stock.

This is a fact of modern investment markets, so I’ll stop the complaining there. Because a while back, I devised a way to battle back against the silliness. Not of earnings, but of the real impact on our wealth when a stock “bombs” earnings, even if the report is solid.

To demonstrate that earnings sensitivity factor I’ve developed as part of my broader Yield At a Reasonable Price (YARP) approach to selecting and managing my stock portfolio, I’ll compare two of the biggest traditional retailers, who compete head-to-head and who are announcing earnings for the latest quarter on consecutive days next week. Walmart (NYSE:WMT) goes on Tuesday, November 19 and Target (NYSE:TGT) on Wednesday, November 20. Both report prior to the market open, which is probably a relief to anyone who prefers not to dissect those reports at the same time as Nvidia (NVDA) reports after the close on 11/20.

My conclusion is that Target is the better choice currently, but that comes with an explanation. I am viewing these two giants through the lens of the process I created and honed over decades, which seeks first to identify solid, profitable businesses (about 50 on my watchlist) and own about 30 of them at any point in time. Importantly, once a stock makes the cut, I put a specific set of rules around it, such as forcing myself to hold at least a 1% position, and not owning (at cost) more than a 5% weighting in any stock.

My Yield At a Reasonable Price (YARP) approach is partly about finding profitable names I judge have low “blowup risk” while I own them, and part of exploiting what I see as a reality of modern markets: stocks just don’t sit still. Their prices fluctuate more than before, and they are more prone to going on “runs” up and down which might last weeks or a few months, only to see the stock give back too much of it for my taste.

This prompts my slogan, “I own stocks, but I also rent them.” In fact, every stock position has elements of both. It is not uncommon for me have a stock I have held for years, but have owned at 1%, 5% and in between at different points in that holding period. So a stock might average being a 2.5% holding over a period of years, as an example. That’s the context with which to understand the comparison of TGT and WMT I’ll dive into now.

Walmart: YARP analysis summary

I’ll steal some of my own thunder and say that this contest was over practically before it started. I would love to own WMT, but if I did, it could not be via the YARP approach. The dividend yield is both too small and wildly overvalued on a long-term basis. As I do with all stocks I analyze, here’s a 7-year dividend yield history. Where is WMT on that spectrum? At the very bottom. Under 1% yield, which is as low as it has been over that time.

That’s naturally due to its strong price appreciation. So while I might be holding it if I bought it a while back, it is no longer a new buy candidate. If I did choose to try to get access to it, it would be outside of my YARP dividend account, perhaps in a sector or industry ETF that has it among the larger holdings. The stock is a member of the Dow Jones Industrial Average, but it is not a big enough holding there to have an ETF like DIA act as a surrogate for owning Walmart.

We can see pretty clearly from this chart below that the ideal time to zero in on WMT was back in 2016. Its yield was steadily coming off a long-term high watermark at that point, and the stock could have been had at nearly a 3% yield. The stock has nearly quadrupled since that point, along with the rest of the big cap space. This helps us understand just how far into this market cycle we are.

These are the Seeking Alpha factor grades I key in on, with profitability being the dominant one. Of course, I want companies that grow and are fairly valued. However, since I rotate my position sizes up and down more frequently than “traditional” buy and hold types, those longer-term evaluations of a stock’s attractiveness are not nearly as critical to me. Sort of like debating how much fire insurance you should carry in the coming years when your house is on fire right now.

And when I look at these grades for WMT, I can check the profitability box. That’s no big surprise, given how well-managed and well-positioned this revolutionary retail staple business is. WMT is a great business, but not a great stock right now. That it is slightly more attractively valued (D- versus F a few months ago) is of no significance to me.

Dividend safety was the “death knell” for my potential consideration of WMT for now. I am friendly to Dow 30 stocks, but not when the dividend safety grade is B-. I prefer a grade of B or better in this measurement. I do track some stocks with that level of safety or lower, and I use other sources as well as Seeking Alpha’s system to assess the possibility that a dividend is vulnerable to cut or elimination. But again, this is a long-term issue in most cases, and the stock price typically signals that there’s a problem maintaining the dividend payout.

This is another reason why the “anchor tenant” in my toolbox of investment strategy is technical analysis. Stocks that have become dividend “issuers” don’t keep rising in price unabated. Price is a signal for a lot of things, from speculative appetite from market participants to worrying about a threat to the dividend or the overall business’s competitiveness. The market usually sniffs it out. That’s why I always say:

“The market tells us a story, we just need to listen.”

WMT’s dividend yield within its sector (all SA factor grades are judged within the stock’s sector, not the broader market) is putrid. We know that from its 0.98% yield as I write this. So while this is an iconic company that will survive as far as the investor’s eye can see, it is not at all on my yield at a reasonable price radar. WMT has very little yield, and it is not priced reasonably at all.

Walmart’s best hope: continued “animal spirits”

Importantly, that does not mean it cannot continue to rise in price indefinitely. Expensive as it is on all of the measures I care about, animal spirits are an ever-present wildcard. That’s why I think of stock investing like this: any stock can go up in value at any time, for any reason. The difference between any investment and any other investment is how much major risk of loss is attached.

I conclude that this “reward/risk trade-off” is far better for TGT than WMT. So I’ll stop dissing the latter and move on to the former!

Target: YARP analysis summary

Since I not only follow TGT on my 50-stock watchlist for potential inclusion in the Sungarden YARP Portfolio‘s stock section, it is also one of the 30 stocks I own, I’ll expand from the set of analytics I used for WMT, and take my TGT case straight from the stock research deck I share live and provide 24/7 access to for subscribers of the new Seeking Alpha investing group I lead.

In addition to the trademarked Yield At a Reasonable Price (YARP) approach, my intellectual property extends to a set of ratings I created and track. They flow into one of two bottom-line scores. “Fitness” is the degree to which a stock fits the characteristics I want in my 30-stock basket at any time. I take the Seeking Alpha quant factor grades I have the most confidence in, weight them myself, and produce that score, which ranges from 5 to 0, with 5 being the best fit.

A score of more than 3 is typically what I seek, but with so many stocks overvalued and many others not growing as well as the mega cap leaders are, Fitness Scores above 3 are not as common as they would be in a depressed stock market.

Target’s Fitness Score is 3.3, which currently ranks in the top 15% of my watchlist universe. That does not guarantee a spot in the 30-stock portfolio, but it challenges me to have a very strong case for it to be excluded. Remember, numbers tell us a lot of the story, sometimes all we need to know. But there are plenty of situations where they don’t, and my job as the group leader is to be the one constantly challenging my own assumptions. That’s been the key to my own investment survival, first running “other people’s money” for 30 years, then more recently providing research to DIY investors since I sold my investment firm in 2020.

Quickly reviewing the sub-scores that are the ingredients Seeking Alpha provides me to do my own thing, profitability is solid at an A grade, and dividend safety checks in at a nice A-. Valuation is reasonable, even excellent when I consider that many stocks rate in the C or D range. So a valuation grade of B just adds to the attractiveness in what, I believe, is an overvalued stock market at the margin.

The growth grade is at least average at a C, and dividend growth, while less of a priority for me than safety, is also superior to most stocks. So add it all up, and TGT currently fits the bill for me.

Now that I’ve made the case to myself that TGT should “hit the board” and be at least a 1% position in the Sungarden YARP Portfolio, let’s see if I can justify it being more than that. Remember, 1% to 5% at cost is my self-limited range.

Below is the “guts” of the decision process. And while one day I might be convinced to “fire” myself and let my own systematic approach make the calls for me, I know better than to go “all in” in markets like this. Perhaps there’s a case for aggressive investors to drop the human judgement and experience component. But when it comes to risk management and with my personal semi-retirement portfolio on the line, I am happy to use these investing aids to power the process I’ve been evolving since the 1990s.

Target has earnings coming up in about a week. That’s bad news for my process. It results in “demerits” and that’s why the sub-score of DUE (days until earnings) is very low and gets a red highlight in my research deck. Maybe earnings will spike TGT’s stock price. But maybe the market will take it to the woodshed. My take: I’ll typically keep a 1-2% position into earnings, maybe 3% at most. But not 4% or 5%. I’ve seen too many earnings “bombs,” even when the company is doing just fine. I led this article off with a statement about earnings being my least favorite season. I mean it! I never believe I’m smarter than the market when it comes to what the earnings will be, and more importantly, what the reaction will be to them.

TGT is a very quirky and rare example in one respect. This quarter, it announces earnings and goes ex-dividend on the same date, November 20. I rarely see that. Usually, there’s a 3-4 week gap between them. That allows me to stay “light” position-wise through earnings and then load up between that report and the ex-date. Not possible here. So they essentially cancel each other out.

TGT’s dividend yield is a shade under 3%, not bad for a stock in a sector other than Utilities or REITs. As noted earlier, the dividend appears solid. In addition, my YARP Ratio is at 64, which means that the stock is in the 64th percentile of its past 7-year dividend yield range. That’s not optimal, but certainly above average in terms of “yield at a reasonable price” using just that single metric. So it is also automatically coded in blue. My color scale for all of this is, from best to worst, green-blue-grey-yellow-red.

Finally, since I don’t go anywhere without a technical chart assessment, here’s that. The research sheet has an automated analysis I created using third-party data and making it my own, similar to what I did with the Fitness Score. But I still don’t make a move without eyeballing the chart. So here it is, with my take below.

I could show you the weekly instead of the daily as I did above, but the result is the same: nothing interesting. Nothing bad, either. Very flat and neutral.

So I conclude from all of this exactly what you probably surmised by reading to this point. I like Target’s stock enough to have it in the portfolio. But it’s a lower-end position until something causes its attractiveness within my system, both individually and relative to other stocks, as well as income and growth ETF holdings I have, improves. Maybe that’s post-earnings, we’ll see. But I’m satisfied with where I am on TGT.

Perspective on analyzing stocks in modern markets

So TGT is a yes for me, and is currently in my portfolio, albeit at a low weighting for now. Let’s see what things look like as the next ex-dividend date approaches, and more significantly, if the stock and market continue to bust to higher levels. WMT is a no, likely until its price more than halves, given that paltry sub-1% dividend yield.

There’s not a world of difference between a 1% position and a 0% position. Or is there? I have 3 tiers, if you will.

1. Not in portfolio.

2. In portfolio, small size.

But I’m constantly looking at those 1%-ers to see if they should be lifted. I don’t do that as actively with stocks outside the Sungarden YARP portfolio.

3. In portfolio larger size (which is always an ongoing decision process for me).

A 1% position can drop 10%, and it is the same impact as a 10% position dropping 1%. Think about that as a way to “invest” without clinging so much to “stock picks.” Process and position size add a whole new dimension to what many self-directed investors are able to do. But Wall Street tends not to focus on that. So I will.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TGT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

SUNGARDEN YARP PORTFOLIO

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The post I Choose Target Over Walmart For Yield At A Reasonable Price (YARP) appeared first on Up2info.com.

• Walmart and Target are both strong dividend payers in the retail sector, but their investment appeal differs considerably in today’s market.
• Walmart’s high valuation reflects its safe-haven status but limits near-term upside potential.
• Target’s lower valuation and higher dividend yield appeal to value-oriented investors, though its reliance on discretionary categories adds volatility.
• Walmart offers consistency for conservative investors, while Target’s current share price is attractive for those with a higher risk tolerance.

Investors value Walmart (NYSE:WMT) and Target (NYSE:TGT), the first and third-largest companies in the Merchandise and Retail industry, for their size and relative stability. However, with high valuations and an uncertain consumer environment, it’s worth considering whether either stock offers much upside potential at current levels.

This analysis examines their business models and growth prospects to assess which might be the preferred investment opportunity—or if both warrant a cautious approach at this time. I conclude that Walmart is a Hold at current valuations, while Target is a Buy for potential long-term investors seeking a combination of income and growth who have tolerance for volatility.

Walmart vs. Target: Business Models

Walmart’s revenue is anchored in its extensive scale and its dominance in essential categories like groceries, attracting a broad base of budget-conscious consumers. Operating over 10,000 stores globally, the company has built a reputation as a low-cost retailer for decades, with its core revenue coming from in-store retail sales of essential goods. Walmart e-commerce platforms, including Walmart Marketplace and Walmart+, now contribute an increasingly meaningful portion of revenue. At around 8.7% collectively, e-commerce represents a fast-growing area for the company, though in-store retail still accounts for the vast majority of revenue. This essential-goods focus allows Walmart to perform reliably in various economic environments.

Target’s business model is more concentrated, with a U.S.-only presence and a product mix tailored toward middle- and upper-middle-income consumers. Key differentiators include private-label lines like Good & Gather in grocery and Cat & Jack in children’s apparel, as well as exclusive partnerships, such as Hearth & Hand with Magnolia. These offerings help Target cultivate brand loyalty by providing higher-quality, unique items that may appeal to shoppers seeking distinctive or trend-forward products. However, unlike Walmart, Target’s revenue mix is weighted more toward discretionary categories, such as apparel and home goods, making its performance more sensitive to economic conditions.

Growth Prospects and Strategic Focus

Walmart’s growth strategy is heavily focused on expanding its digital footprint, which has become a significant driver of growth. Investments in automation, such as robotics in fulfillment centers and AI-driven inventory management, aim to reduce costs and reinforce its logistical advantages. At the same time, third-party sales on Walmart Marketplace and its Walmart+ subscription service are helping to diversify its revenue base. With e-commerce now approaching 10% of the company’s total revenue, these digital sales represent a significant growth area and driver of potential long-term share appreciation.

Target’s growth strategy includes an integrated omnichannel approach with same-day fulfillment options like curbside pickup, similar to Walmart’s. Digital integration remains a central focus for Target, but it faces intense competition from both Walmart and Amazon in this area. The company’s emphasis on exclusive brands and private-label products helps foster customer loyalty and reinforces its unique position in the retail market. However, Target’s reliance on discretionary categories and U.S.-only market presence could constrain growth if economic conditions weaken, potentially leaving it more vulnerable than its larger, more diversified peer.

Walmart vs. Target: Performance

The thrust of this analysis is well-captured in the chart below, which compares the ten-year total return for Walmart and Target:

Walmart’s annualized return of around 27.5% has come mostly through steady, consistent gains with some steepening over the past year. Target’s returns have been more volatile, with its share price climbing from around $94 during the COVID lows to over $260 just sixteen months later. The impact of the pandemic on Walmart’s stock performance is almost unnoticeable. The two-year period from November 2021–November 2023 was exceptionally challenging for Target, reflecting its struggles with inflation, inventory management, and shifts in consumer spending away from home goods to experiential activities. But a key takeaway is that up to May 2024, the two companies had essentially identical total returns over the preceding decade. Walmart has pulled ahead over the past six months as Target’s share price continues along a more volatile path.

That said, Seeking Alpha’s Quant system currently has Target as a Strong Buy and Walmart as a Hold, with Target holding the edge in three of the five factors—most notably, in valuation:

Walmart vs. Target: Valuation

Walmart’s valuation, trading at a P/E of around 33x, reflects market optimism about its stability and growing e-commerce potential. While the digital expansions support this premium valuation, it may limit near-term upside for new investors, as much of Walmart’s growth potential may already be priced in. On a price-to-free cash flow basis, Walmart’s valuation exceeds 50x, with substantial capital expenditures directed toward digital and logistics initiatives. These investments position Walmart for long-term competitiveness but limit free cash flow available to shareholders in the near term. Although Walmart is expanding into higher-margin segments like advertising, healthcare, and third-party sales, these areas are still a relatively small part of total revenue, meaning its safe-haven status might come with limited shorter-term growth potential.

Click to enlarge

Target’s valuation is more appealing on a relative basis, trading at a forward P/E of ca. 15x. This lower multiple is attractive, but as noted, its reliance on discretionary sales introduces volatility. If the economy contracts, demand for non-essential items could weaken, potentially offsetting the valuation advantage. Recent insider selling, including by Target’s CEO, has raised questions about management’s confidence in the company’s near-term performance.

Walmart vs. Target: Shareholder Returns

Walmart’s forward dividend yield of around 1% puts it in the category of a stable, low-risk investment rather than a strong income generator. Given the company’s substantial capital expenditure in digital transformation and logistics, free cash flow has been constrained, potentially capping dividend increases in the near term. Although Walmart’s dividend has grown without pause for over a half century, the low yield combined with a high valuation reduces its appeal for some investors.

Target’s forward dividend yield of around 3% is a more attractive option for income-seeking investors. The company has maintained a moderate payout ratio—higher than Walmart’s but still allowing plenty of room for future increases, assuming earnings remain stable. But again, if economic conditions worsen and consumer spending on non-essential items declines, dividend growth would likely be constrained. Like Walmart, Target has capital demands for inventory and pricing adjustments, but its focus on discretionary categories may amplify the impact on its ability to maintain consistent dividend growth in challenging economic conditions.

Final Verdict: Stability vs. Value

Walmart’s expansive business model and market positioning provide stability in uncertain times, yet its high valuation may constrain near-term upside. As a safe-haven investment, Walmart does offer consistency, but new investors may find limited appeal in a stock that is already trading at historically high multiples. The company’s advancements in e-commerce, logistics, and digital expansion support long-term growth for investors with a multi-year outlook.

Target’s lower valuation and higher dividend yield make it a more appealing option for value-oriented and income-focused investors, particularly those comfortable owning more economically sensitive companies. However, Target’s exposure to discretionary categories and recent insider selling may give some investors pause; the stock may be more suitable for those with a higher tolerance for volatility.

In sum, Walmart’s stability makes it a sensible choice for conservative investors, though initiating a new position at the current price is unappealing. Target’s valuation and yield provide greater potential rewards for those willing to ride out a more challenging near-term environment, and the current share price may present a reasonable entry point to begin dollar-cost averaging.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Walmart Vs. Target: Which Retail Giant Is A Buy At Today’s Valuations? appeared first on Up2info.com.

• Target Corporation’s Q2 2024 results were positive, the stock remains undervalued with a fair value estimate of $177, implying an 18% upside.
• Despite strong short-term potential, Target’s long-term growth is questionable due to moderate net margins, high CAPEX, and competitive pressures.
• Target’s digital sales grew significantly, but overall revenue growth and earnings predictability remain inconsistent, raising doubts about sustainable long-term performance.
• Market undervaluation justifies a “Buy” rating for speculative investors, but long-term investors should take into account financial performance risks and volatility.

Target Corporation (NYSE:TGT) released positive Q2 2024 results, and management assured stockholders that the company “is back to sales growth.” With the holiday season approaching and the shopping spree already beginning, it would be expected that this story would be capitalized on until Christmas in anticipation of even stronger results next quarter.

Instead, the price has closed the earnings gap and remains in a wide range, leaving Target’s valuation at a discount to the industry. My calculations put the stock’s fair value at $177, which implies an upside of 18.5%. That’s why I’ve put a BUY on this stock, but there are so many pitfalls to this investment idea that I would set an “avoid” status on it if it were available to conservative long-term investors. While there is short-term potential, I don’t see Target as a long-term favorite. These are the factors that were top of my mind when I compared having a short-term versus a long-term perspective.

Profitability Growth Should Not Be Misleading

By announcing earnings per share of $2.57, Target demonstrated significant growth of 42% year-on-year. However, the 2nd quarter comparable sales increased by 2%, and this growth is fully provided by the traffic growth of 3%.

The company’s Q3 guidance on earnings is more restrained and declares an earnings-per-share range of $2.1-2.4. If we take its middle, then in relation to the same quarter last year, growth will be only 7.2%, which is also not bad, but far from the astronomical figures above. Most likely, for this reason, the market practically ignored that positive statement.

Looking at the 6 months’ results, Target Corp., with a 29% gross margin, almost 6% operating margin and over 4% net profit margin, occupies a leading position in terms of efficiency in the Consumer Retailing industry. The company is ahead of giants Walmart (WMT) and Costco (COST), second only to Dollar General Corp (DG) in terms of profitability metrics.

Cash flows are also excellent, and the almost 2-fold excess of cash flow from operating activities over net profit indicates its high earnings quality. ROIC has grown from 13.7% to 16.6% over the year, which confirms high operational efficiency. I was surprised that the company calculated it and provided it in the report – usually have to count it myself. Despite my calculations of return on invested capital showing a slightly more modest value, I will operate with official data.

But there is always a “but” in this story for me. If the company stands out in the industry for its profitability, then concerning the broad market, a 4% net margin is not even a moderate level. I also look at the CAPEX, which is 73% of net profit (TTM), and the SGA share of gross profit, which is 71%, and conclude that despite the relative efficiency, the company does not have “killer” competitive advantages, which means it casts doubt on the sustainability of future growth for me.

Author’s Interpretation Of Growth Sustainability

I like the quantitative approach. Firstly, it is objective. Secondly, it provides answers even to questions in those areas where I am not a big expert. Even though the growth rate of e-commerce is higher than that of physical retail, this segment is also growing. By the way, the digital segment of Target showed a significantly greater increase in comparable sales (+8.7%) than the traditional one (+0.7%) in the second quarter.

Back to US brick-and-mortar retail revenue. Actual growth was 4.2% CAGR with a high level of stability, and with the continued growth of the US economy, the acceleration of market expansion is expected to be significant (more than 8% CAGR until 2026). However, if we take the last 12 values ​​of YoY changes in Target’s EPS, we will see an extremely low degree of consistency.

How did I determine this? The average value of 25% is 4.5 times lower than the standard deviation of this sample. Based on this, I am very cautious about consensus forecasts and the company’s guidelines. Even relying on them, the projected net income growth just is slightly higher than the actual one over 5 years: 9% vs. 7%. At the same time, the revenue growth rate is expected to fall: 3% vs. 7%. All these numbers are lower than the benchmark for industry.

This fact and the low mathematical values ​​of persistence make the company’s further growth questionable for me, which harms the long-term understanding of the stock’s prospects. TGT price jumps are directly related to the company’s net income dynamics.

Not Much Room For Margin Increase

I don’t want to mislead by saying that I am relatively bullish in the short term and quite bearish in the longer period. It’s just that different factors come to the fore for different time frames. So despite the current upside, I doubt the company’s long-term confident development.

Here’s another reason: the current operational efficiency is huge, but I still have doubts that the company will be able to maintain its earnings growth rate if revenue growth slows. I did a detailed line-by-line analysis of the last 7 years of income statements and the current balance sheet and found the following interesting facts (comparable periods of 6 months):

• COGS has fallen in the last 2 years from $38.6b to $35.2b, and this decline was stronger than the decline in revenues. This allowed the gross margin to return to levels of ~30%. I see the main reason for this is the decline in inflation. Target cannot keep this factor, especially given the rate cut cycle is on.

• At the same time, SGA expenses are steadily growing even in this period, confidently holding above 70% of gross profit. This indicates an extremely high level of competition and an extremely high risk of losing the market when reducing marketing expenses.

• Although interest expenses make up only 7% of EBIT, and I rate the key metric of debt burden as positive, the other debt indicators are not so good: Cash-flow-to-Debt ratio is significantly less than 1 (0.54) and the debt of $15.4b exceeded equity by 1.17 times. All this, with cash in the accounts of $3.5b, makes further acquisitions to keep the business growth burdensome. And competitors, especially from the e-commerce segment, are not asleep. Amazon (AMZN) invests almost as much in CAPEX as Target sells.

Back To The Undervaluation

Target has a fairly high valuation grade. But it is based on a comparison with the sector median. And here the company does have growth potential.

But I think the above risks partly justify this discount, calling into question the outstanding and sustainable growth rates of future periods.

The average price target upside is about 17%, and I pretty much agree with this, having made the calculation using my own method. I keep statistics of company valuation at the end of each report (at the close of the day after the release) and the median value of Target over the last 3 years is 18.3x net profits.

It seems to me that this approach to company valuation has a lot in common with the phrase “fair value” since it takes into account only the opinion of Mr. Market. Since the current P/E is around 15x, I got an upside of 18% to a fair level of $177 (current EPS for 12 months, multiplied by a multiple of 18.3). The current financial performance is quite close to the average and forecast, so I consider this valuation to be highly accurate.

Risk Discussion

Market undervaluation is the core of this investment idea. “Buy” status is based on the historical multiples valuation method and is not supported by other areas of company analysis according to my quantitative model. This means that there are significant risks of revaluation in the long and even medium term in case of earning-per-share volatility.

The simplest mathematical analysis above in combination with the characteristics of financial performance indicates a high degree of unpredictability of the company’s results in the midterm. Also, out of the last 10 quarters, 6 reports came out with a strong surprise over expectations, and 4 were missed.

Another pair of values ​​demonstrating a high degree of risk for this investment is TGT`s average annual return and the standard deviation of returns over the last 5 years. The expected return is 6.6% while deviation is hugely 35.2% making this idea pretty risky by default. A beta greater than 1 can add volatility to your portfolio despite being in a defensive sector.

Your Takeaway

Following the latest earnings release, Target returned to the growth track. However, when analyzing the company through detailed quantitative research of the statements, I concluded that the current relative undervaluation by the market is partially justified. It is due to the financial characteristics of the business, which, although exceeding industry benchmarks, fall short of the benchmarks that I have set for myself. I mean low absolute levels of net and operating margins, positive net debt and insufficient growth rates. As a long-term investor, I will avoid investing in TGT, although speculative and riskier colleagues may participate in the campaign to get an 18% upside.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Target: Quantitative Analysis Suggests Upside But Warns Of Long-Term Investment appeared first on Up2info.com.