After a 31% decline in the last five days, at the current price of around $153 per share, we believe Target (NYSE: TGT), the second-largest discount chain in the U.S. – could see only modest gains in the long term. TGT stock has declined from around $213 to near $153 in the last week, compared to a 2% fall in the S&P index. The stock decline during this period can be attributed to the fall in Q1 earnings, missed estimates, and negative cash flow – driven by a slowing economy and supply chain worries. Despite rising sales, Target’s profits actually got cut in half due to soaring costs. The retailer had to offer more discounts to clear excess inventory because customers spent less on discretionary items. In addition, higher spending on fuel, freight, transportation, and increased compensation and headcount in distribution centers also weighed heavily on the company’s profitability.
Target’s revenue rose 4% y-o-y to $24.8 billion in its fiscal first quarter on the back of a 3.3% increase in comparable sales. However, the retailer’s gross and operating margins fell to 25.7% and 5.3%, respectively, down from 30% and 9.8% in the year-ago quarter – as a result of costs rising faster than its sales. Consequently, the company’s EPS was down 48% y-o-y to just $2.16 per share.
For full-year fiscal 2022, Target expects low-to-mid-single digit revenue growth and anticipates its operating income margin rate to be around 6%. We have revised our model based on the recent earnings. We forecast Target’s Revenues to be $109 billion for the next fiscal year 2022, up 2.5% y-o-y. Looking at the bottom line, we now forecast earnings per share (EPS) estimate to come in at $13.40. Given the changes to our revenues and EPS forecast, we have lowered Target’s Valuation to $162 per share, based on a $13.40 expected EPS and a 12.1x P/E multiple for the fiscal year 2022. This means the stock is trading at a small 6% premium to the current price.
Target’s management expects supply chain issues to last through 2022, and with the present 40-year-high inflation weighing heavily on its margins, it looks like the company’s short-term outlook will be pressured. Customers are cutting back on their discretionary spending due to higher food, fuel, and housing costs. The higher gas prices are increasing the cost of shipping goods to consumers when they do make purchases. To add to this, some Target consumers may be shifting to value retailers or dollar stores, which may hurt the company further.
It is helpful to see how Target’s peers stack up. Check out how Target’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-5%||-18%||75%|
|Trefis Multi-Strategy Portfolio||-7%||-23%||208%|
 Month-to-date and year-to-date as of 5/19/2022
 Cumulative total returns since the end of 2016
Invest with Trefis Market Beating Portfolios