VALUATION HIGHLIGHTS

1. Target U.S. constitutes 100% of the Trefis price estimate for Target's stock.

WHAT HAS CHANGED?

1. Target Suffers From Shift In Consumer Spending

Consumers are still pulling back on discretionary purchases. Target's Q2 revenue fell 5% year-over-year (y-o-y) to $25 billion due to a 5.4% decline in comparable sales. Further, comparable digital sales also fell 10.5% in Q2. However, the retailer lapped a period with unusually high inventory levels in the year-ago quarter and made progress on initiatives to improve its gross profit margin. Same-day fulfillment services, a longtime source of strength for the company, was up 4% with a 7% increase in Drive-Up. TGT reduced its inventory by 17% y-o-y, which helped drive gross margin up from 21.5% in Q2 2022 to 27% in Q2 2023. Consequently, Target's operating income improved by 360 basis points to 4.8% and adjusted earnings per share quadrupled from $0.39 in Q2 2022 to $1.80 in Q2 2023.

Note: Target's FY'22 ended on January 28, 2023. Q2 FY'23 refers to the quarter that ended on July 29, 2023.

2. Guidance

Target's guidance reflects continuing headwinds in consumer demand and the company forecasted a mid-single-digit comparable sales decline for the second half of the year, and it cut its full-year 2023 adjusted earnings per share forecast from $7.75-$8.75 to $7.00-$8.00. For the third quarter, it called for a similar decline in comparable sales and adjusted earnings per share of $1.20-$1.60.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Target's value that present opportunities for upside or downside to the current Trefis price estimate for Target:

• Target's Average U.S. Revenue per Square Foot: Target's average U.S. revenue per square foot increased from $388 in 2020 to $447 in 2022. Going forward, we expect this figure to rise, driven by the company's small store expansion, rewards program, and improving online sales. We currently forecast Target's revenue per square foot to reach $460 by the end of our forecast period. However, if the average revenue per square foot grows faster than expected due to strong online sales, reaching $470 by the end of our forecast period, there could be a 5% upside to Target's stock price.


• Total Number of Target U.S. Stores: The total number of Target stores has increased consistently, driven in large part by the small-format stores. We forecast that the retailer's store count will reach around 2,000 by the end of our forecast period. However, if Target manages to expand more rapidly without losing average sales per store, and its store count reaches 2,050, there can be an upside of about 5%. This could happen if it penetrates more urban markets with smaller format stores.
  For additional details, select a driver above or select a division from the interactive Trefis split for Target at the top of the page.
  

  BUSINESS SUMMARY

  
  Target Corporation is among the ten largest retailers in the U.S. by sales. Target generated around $109 billion in revenues in 2022 through selling apparel, electronics, housewares, groceries, and other products. It had around 1,948 U.S. stores under operation as of the end of 2022.
  

  KEY TRENDS

  
  

  Threat of self-cannibalization due to massive size

  Like any retailer, Target's long-term sales and income growth depend largely on the company's ability to open new stores and expand into new markets. However, due to Target's size, it runs the risk of cannibalizing its own sales in the US.
  

  Greater focus on groceries to improve store traffic

  Consumer spending on groceries can be classified as non-discretionary and is, therefore, less correlated to macroeconomic factors. Target has focused on growing its grocery business due to its non-discretionary nature, in addition to the fact that many customers still prefer to buy groceries in stores rather than online. However, the grocery segment is a relatively low-margin business.
  

  Growth in e-commerce

  Target's online sales do not contribute much to its overall revenues, but they have been growing at a robust pace. We expect this to continue, with the e-commerce business eventually becoming a substantial contributor to the company's overall revenues.