Does Target Stock Have More Room To Run?

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[Updated: 09/14/21] Target Stock Update

Target (NYSE: TGT) recently released its Q2 report, wherein revenues came in flat and adjusted earnings per share (EPS) were 5% above our estimates. The company’s revenues grew a strong 9.5% year-over-year (y-o-y) to $25.2 billion, on the back of U.S. comparable sales rising 8.9% during the second quarter (which also was ahead of the comps consensus estimate of 8.2%). While digital sales contributed to these gains, rising customer traffic was the biggest factor as it handled 13% more transactions in this quarter than it did a year ago. In addition, the discount retailer’s operating margin held steady at 10% of sales in Q2, almost double Walmart’s (NYSE: WMT) rate – largely due to higher prices and a shift in demand toward premium products. Also, the company’s EPS was able to expand 8% y-o-y in Q2, despite higher marketing and wage expenses. Target is seeing no sign of a demand slowdown as consumers are still eagerly spending in attractive categories like apparel, toys, and home furnishings – despite the pullback of some stimulus measures. The company is doing an excellent job adjusting to changes in consumer preferences with its drive-up, pickup in-store, and same-day delivery via Shipt services. We expect this trend to continue into Q3, as well.

For full-year 2021, Target is expecting high single-digit growth in comparable sales, near the high end of the previous guidance range of positive single-digit comparable sales growth. It is also expecting an operating income margin rate of 8% or higher. For context, the highest operating margin it has reached in the last decade was 7.6% in 2012 and 2013. However, the company’s profitability could have an adverse impact in 2021, due to rising spending and higher transportation and wage expenses in the back half of the year. We have updated our model following the fiscal Q2 release. We now forecast sales to be $102 billion for fiscal 2021, up 9% y-o-y, and adjusted EPS to come in at $12.42, up 32% y-o-y. Given the changes to our revenues and earnings forecast, we have revised our Target Valuation at $263 per share, based on $12.42 expected EPS and a 21.2x P/E multiple for fiscal 2021 – 8% higher than the current market price.

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[Updated: 08/17/21] Target Q2 Pre-Earnings

Target (NYSE: TGT), the second-largest discount chain in the U.S., is scheduled to report its fiscal second-quarter results on Wednesday, August 18. We expect Target’s stock to likely see little movement due to revenue and earnings coming in line with the market expectations. The retailer saw a boost in products related to in-home activities, such as home office and entertainment needs during the pandemic. While Target was one of the biggest pandemic winners in 2020, it still continues to grow even though consumers have many more shopping options available compared with this time last year. The retailer’s comparable sales soared 22.9% in Q1 to smash the consensus mark of +10.7%. Instead of building out more e-commerce fulfillment centers (as was the need in 2020), Target decided to put its stores at the center of its omnichannel strategy, leveraging them for same-day pickup. This strategy has helped it lay a solid foundation for the company’s growth so far and helped it deliver an operating margin of 9.8% in Q1, ahead of rivals such as Amazon, Costco, and Walmart. Our forecast indicates that Target’s valuation is around $263 per share, which is near the current market price. Look at our interactive dashboard analysis on Target’s Pre-Earnings: What To Expect in Q2? for more details.

(1) Revenues expected to come in line with consensus estimates

Trefis estimates Target’s Q2 2021 revenues to be around $25.2 Bil, in line with the consensus estimate of $25.1 Bil. In 2020, Target showed that its brick-and-mortar stores have a place in the future of retail, and it’s leveraging that position to add more convenient online alternatives. The retailer invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt, all this while leveraging its brick-and-mortar stores – resulting in a 90% y-o-y increase in same-day service revenues in Q1. This was driven by 123% growth of Drive Up sales, of which in-store pickup sales rose 52%, while sales through Shipt gained 86%. We expect the company to ride on this growth momentum in Q2 as well. Looking ahead, Target is stepping up its offering by making fresh and frozen groceries available through Order Pickup and Drive Up. In addition, as shoppers return to their usual buying habits, there could be a surge in Target’s sales in apparel and other higher-margin discretionary categories, as well. Target’s discounted prices and private-label brands (that differentiate it from Amazon) are a big draw for customers.

2) EPS also likely to be around consensus estimates

Target’s Q2 2021 earnings per share (EPS) is expected to be $3.48 per Trefis analysis, in line with the consensus estimate of $3.49. While the retailer saw incremental expenses in Q1, its stronger revenue growth helped to offset those expenses. Consequently, the retailer’s adjusted EPS jumped 64% during this period.

For the full year 2021, we expect Target’s adjusted net margin to grow 110 basis points to 6.1%. This coupled with a 9% growth in Target’s revenues, could lead to a rise of $1.5 billion y-o-y in adjusted net income to $6.2 billion in 2021. All this, resulting in a possible adjusted EPS increase from $9.42 in FY 2020 to around $12.42 in FY 2021.

(3) Stock price estimate largely around the current market price

Going by our Target’s Valuation, with an adjusted EPS estimate of around $12.42 and P/E multiple of 21.1x in fiscal 2021, this translates into a price of $263, which is in line with the current market price.

For further comparison among peer groups, it is helpful to see how they stack up.  Target Stock Comparison With Peers shows how TGT compares against peers on metrics that matter.

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