A Closer Look At Target’s Valuation

by Trefis Team
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Target (NYSE: TGT) has been overhauling its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management. In fact, the results of Target’s business transformation have started to show in the company’s financials from Q1 on. However, the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, is leading to shrinking margins.

In the company’s recent earnings, Target’s revenue increased 6% year-over-year (y-o-y) to $17.8 billion, primarily due to a strong 5.1% increase in comparable sales. Among the components of the reported comparable sales, traffic grew 5.3% y-o-y and the average transaction amount decreased 0.2% y-o-y. In addition, the company’s digital comparable sales grew 1.9% y-o-y, while store comparable sales grew a robust 3.2% y-o-y. The fact that the company has been able to grow its store comparable sales, despite significant competitive pressure, suggests that its initiatives are resonating well with customers. In terms of the bottom line, the company’s adjusted EPS grew more than 20% y-o-y during this period.

We have summarized our forecasts in our interactive dashboard on Target’s Fundamental Value. You can modify assumptions such as changes in expected segment revenue or EBITDA margins to see how they impact the company’s value. The charts below show some of the key steps in identifying Target’s valuation sensitivity to changes in its segment revenues. We detail how changes in revenue or segment EBITDA margin impacts total EBITDA, which in turn impacts its enterprise value (assuming a constant EBITDA multiple). We have maintained our long-term price estimate for Target at $83, which is almost 20% ahead of the current market price.

Detailing Forecasts For Target

We forecast Target’s total revenue for fiscal 2018 by estimating the number of stores, square footage per store and revenue per square foot in fiscal 2018. We expect Target’s 2018 store count in the U.S. to be over 1840, with an average square footage per store of 306k and revenue per square foot of $132, translating into around $75 billion (+4% y-o-y) in domestic revenues in fiscal 2018.

Target plans to leverage its network of stores, and Shipt’s technology platform and community of shoppers, to add same-day delivery to its capabilities. In addition, the company is looking to open 30 small-format stores and remodel close to 325 stores this year. The company continues to expect full-year adjusted EPS of $5.30 to $5.50 and GAAP EPS of $5.41 to $5.61.

Our forecasts for the year are summarized in our dashboard for Target. If you have a different view, you can modify various inputs to see how updated inputs impact the company’s valuation. You can also share the links to scenarios created on our platform.

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