Will Target Stock Recover To Highs Seen Prior To Inflation Shock?

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TGT: Target logo
TGT
Target

Target (NYSE: TGT), the third-largest discount chain in the U.S. after Walmart and Costco, currently trades at $132 per share, around 51% below its level of $266 seen on November 16, 2021 (pre-inflation shock high), and has the potential for sizable gains. TGT saw its stock trading at around $139 in the middle of June 2022, when the Fed kept increasing rates, and now remains marginally below those levels. In comparison, the S&P 500 gained about 20% during this period. Target’s stock hasn’t seen much improvement because the retailer continues to have many headwinds. The company’s comparable-store sales were up a disappointing 1% in Q1 2023, mainly thanks to softness in areas like home furnishings and decorations. Customer traffic rose at the same sluggish rate. In addition, some consumers are boycotting Target to punish the company for displays and merchandise that support certain social communities. There is no denying that Target finds itself in culture wars on social media, which is affecting its brand. Still, we believe that these roadblocks will likely be short lived and the company will recover its prior earnings power thanks to the combination of its rising prices, current lower inventory, and slowing cost inflation.

Returning to the pre-inflation shock level means that Target will have to gain about 120% from here. While it has the potential to recover to those levels, we estimate Target’s Valuation to be around $171 per share, about 30% above the current market price. Our detailed analysis of Target’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

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Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
  • Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how TGT stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

TGT and S&P 500 Performance During 2007-08 Crisis

TGT stock declined from nearly $65 in October 2007 (pre-crisis peak) to $28 in March 2009 (as the markets bottomed out), implying that TGT stock lost almost 56% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $48 in early 2010, rising roughly 71% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

TGT Fundamentals Over Recent Years

TGT revenues increased from around $78.1 billion in 2019 to about $93.6 billion in 2020, due to the impact of Covid-19 as consumers stock piled essentials during that time. The sales continued to rise albeit at a slower rate as the economy recovered from the impact of the pandemic. Target’s revenue reached $109.1 billion in 2022. Earnings per share grew from around $6.42 in 2019 to $14.23 in 2021, while it fell to $6.02 in 2022. The retailer’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 in 2022.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Target stock has the potential for strong gains once fears of a potential recession are allayed.

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Returns Jul 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 TGT Return 0% -12% 82%
 S&P 500 Return -1% 15% 97%
 Trefis Multi-Strategy Portfolio 2% 21% 288%

[1] Month-to-date and year-to-date as of 7/11/2023
[2] Cumulative total returns since the end of 2016

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