After a 20% decline year-to-date, at the current price of around $119 per share, we believe Target (NYSE: TGT), the second-largest discount chain in the U.S. – could see gains in the longer term. TGT stock has declined from around $149 to nearly $119 YTD, compared to a 14% growth in the S&P index. The stock decline during this period can be attributed to shifting consumer sentiment and slowing company sales. Consumers are still pulling back on discretionary purchases. Target’s Q2 revenue fell 5% year-over-year (y-o-y) to $25 billion due to a 5.4% decline in comparable sales. Further, comparable digital sales also fell 10.5% in Q2. However, the retailer lapped a period with unusually high inventory levels in the year-ago quarter and made progress on initiatives to improve its gross profit margin. Same-day fulfillment services, a longtime source of strength for the company, was up 4% with a 7% increase in Drive-Up. TGT reduced its inventory by 17% y-o-y, which helped drive gross margin up from 21.5% in Q2 2022 to 27% in Q2 2023. Consequently, Target’s operating income improved by 360 basis points to 4.8% and adjusted earnings per share quadrupled from $0.39 in Q2 2022 to $1.80 in Q2 2023. Having said that, the company’s next few quarters could show sluggish sales trends that reflect weak demand for some key product lines. We expect the company shares to likely remain under pressure in the short term.
Notably, TGT stock had a Sharpe Ratio of 0.5 since early 2017, which is slightly lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
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) to come in at $7.62. Given the changes to our revenues and EPS forecast, we have revised our Target’s Valuation to $138 per share, based on an $7.62 expected EPS and a 18.1x P/E multiple for the fiscal year 2023. This means that our estimate is 15% higher than the current market price.
Target’s guidance reflects continuing headwinds in consumer demand and the company forecast a mid-single-digit comparable sales decline for the second half of the year, and it cut its adjusted earnings per share forecast from $7.75-$8.75 to $7.00-$8.00. For the third quarter, it called for a similar decline in comparable sales and adjusted earnings per share of $1.20-$1.60.
It is helpful to see how its peers stack up. TGT Peers shows how TGT stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-3%||14%||95%|
|Trefis Reinforced Value Portfolio||-4%||26%||547%|
 Month-to-date and year-to-date as of 9/21/2023
 Cumulative total returns since the end of 2016
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