What’s Next For Target Stock After A 32% Fall In The Last Year?

TGT: Target logo

After a 32% decline in the last twelve months, at the current price of around $163 per share, we believe Target (NYSE: TGT), the second-largest discount chain in the U.S. – could see modest gains in the long term. TGT stock has declined from around $237 to nearly $163 in the last twelve months, compared to a 6% fall in the S&P index. The stock decline during this period can be attributed to a slowing economy, supply chain worries, and shifting consumer sentiment. Shoppers were focused on staples and less interested in many of Target’s more discretionary categories like home furnishings. Target’s accelerating promotions to help resolve a mishandled inventory situation from earlier in FY 2022, and higher spending on fuel, freight, transportation, and increased compensation in distribution centers weighed heavily on the company’s profitability. Consequently, Target’s operating income plummeted 57% year-over-year (y-o-y) in FY’22, coming in at a meager $3.85 billion, an operating income margin of just 3.5% (compared to 8% the previous year in FY’21). Also, its adjusted earnings per share were chopped by half to $6.02 in FY 2022 from $13.56 in FY 2021. Despite rising costs, Target’s revenue rose 3% y-o-y to $109 billion in FY’22 on the back of a 2.2% increase in comparable sales. It should be noted that TGT’s traffic rose almost 2.1% (on a 12.3% spike the previous year) in FY’22, meaning that the company is still able to retain the interest of its shopper base. Target’s customer loyalty, light inventory levels, and higher revenue due to omnichannel initiatives and brand partnerships could likely drive the stock higher in the longer term. However, as long as its base level of profitability remains uncertain, shares will remain under pressure.

We forecast Target’s Revenues to be $111.5 billion for the fiscal year 2023, up 2% y-o-y. Looking at the bottom line, we now forecast the earnings per share (EPS) estimate to come in at $8.49. Given the changes to our revenues and EPS forecast, we have revised our Target’s Valuation to $171 per share, based on an $8.49 expected EPS and a 20.2x P/E multiple for the fiscal year 2023. This means that our estimate is 5% higher than the current market price.

Following Target’s price cuts in the second half of 2022, its inventory levels are much improved today. These discounting pressures should ease through FY 2023, and management is predicting that the operating margin could rebound to as high as 5% of sales in fiscal Q1. Management expects better operating conditions this year, estimating an additional $1 billion in operating income. In the interim, 2023 EPS guidance stands at $7.75 to $8.75, a fairly wide range reflecting uncertainty regarding the economy.

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Returns Apr 2023
MTD [1]
YTD [1]
Total [2]
 TGT Return -1% 10% 126%
 S&P 500 Return 1% 8% 85%
 Trefis Multi-Strategy Portfolio 1% 9% 245%

[1] Month-to-date and year-to-date as of 4/14/2023
[2] Cumulative total returns since the end of 2016

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