Can Target’s Stock Cross The $100-Mark In 2019?

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 2018 on. However, the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, is leading to shrinking margins.

Target’s stock fluctuated between $66 to $89 over the course of 2018, largely due to growing margin concerns – despite strong financial results. We currently have an $83 price estimate for the company, which is almost 25% ahead of the current market price. In this note, we analyze the factors that could result in further upside to our price estimate toward the $100 levels in 2019. We have created an interactive dashboard How Can Target Reach $100 In Fiscal 2019? which details steps to arrive at our estimates. You can adjust the drivers to see the impact any changes would have on the company’s share price estimate.

Detailing Forecasts For Target

We forecast Target’s total revenue for fiscal 2019 by estimating the number of stores, square footage per store, and revenue per square foot in fiscal 2019. We expect Target’s 2019 store count in the U.S. to be around 1850, with an average square footage per store of 311k and revenue per square foot of $134, translating into around $77 billion in domestic revenues in fiscal 2019. In order for the company to see an upside of 20%, we estimate that the company’s revenues would have to increase 4% from this evaluation and grow to around $80 billion in 2019. Further, we also forecast the retailer’s EBITDA margins to grow 60 basis points in our upside scenario, translating into EBITDA of $8.3 billion.

We forecast Target’s price to EBITDA multiple of a little less than 6x, and its EBITDA to be $14.20 per share in 2019 to arrive at our price estimate of $83. Assuming the multiple can grow higher to around 6.4x, Target will need around $15.80 in EBITDA per share, in order to be worth $100 per share. This is feasible if the company can successfully increase its digital sales and expand its private label success further. Some of the performing Target labels include A New Day, Good fellow, Project 62, JoyLab, Smartly, to name a few. These private labels could help drive more traffic and higher margins in 2019, driven by their exclusivity.

Going forward, 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 also continues to invest in the digital shopping experience through its app, which now integrates Cartwheel. It has also invested in in-store pickup, drive-up service, and Target Restock. These efforts have helped the company grow its store comparable sales, despite significant competitive pressure, suggesting that these initiatives are resonating well with the customers.

 

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