When Will Financial Pros Love Target?

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Target is a great company and consistently one of the top searches by financial pros looking at the stocks of discount retailers.

But there are good reason shares have collapsed since the high in 2021.

We’ll explain why that is and whether we believe this is the time to step into the stock.

Target’s Business

Considered the ‘upscale’ discount retailer, Target is a one-stop-shop retailer offering everything from groceries to apparel to electronics. It hits the unique trifecta of quality, value, and convenience.

Source: Target 2022 Annual Report

In its retail empire, Target provides various services, catering to customers who demand more than just great products. 

Same-day delivery? Check.
In-store pickup and drive-up? You got it. 

Not to mention Shipt, Target’s personal shopping service.

Little-known fact: Target pioneered omnichannel retailing, melding the physical and digital realms for a seamless customer journey.

Since 2021, Target’s stock has been in freefall, down slumping over 50% from its all-time highs.

The company has struggled with declining sales, increased theft, inflation, excess inventory…just about everything that could go wrong has gone wrong.

Analysts worry the decline in consumer spending, which is due to a revenue slowdown and compressed margins, won’t let up anytime soon.

We believe that’s overly pessimistic and discounts Target’s ability to manage expenses when needed.

Financials

Source: Stock Analysis

Revenues showed significant weakness, declining YoY in 2023. We expect erosion to continue in durable goods, apparel, and electronics over the next year.

However, food and beverage is unlikely to see a meaningful drop.

Taken together, this will likely push margins down even further for Target, 

While debt has increased, the total interest expenses have barely budged. Capex will hit $4 billion to $5 billion this year as management opens new stores, refreshes old ones, and invests in supply chain enhancements.

With almost $8 billion in cash from operations, the dividend is more than covered.

Valuation

Source: Seeking Alpha

Target was trading close to 20x at its height in 2021. While it’s cheaper now, it’s not where we’d like to see it.

Dollar General (DG) is cheaper. But as a whole, all the discount retail stocks trade at lofty multiples.

Where Target does shine is its price-to-operating cash flow ratio.

However, it’s worth noting Target’s price-to-free-cash flow ratio is about 30x. 

When the stock peaked, it was closer to 10x.

Growth

Source: Seeking Alpha

Target also suffers from a growth problem.

Every other retailer, from Walmart (WMT) to Costco (COST) expects sales to increase this year in the high single digits. 

Target isn’t sure they’ll do better than flat.

The company has also seen its EBITDA and EPS decline for the last several years, while companies like COST keep delivering YoY improvements.

Profitability

Source: Seeking Alpha

Profit-wise, Target’s gross margins aren’t bad relative to its peers.

However, its EBIT margins have shrunk along with its net income margin.

The negative free-cash-flow margin is concerning.

Our Opinion 7/10

$88-$90 is where we see Target’s stock headed. There’s technical chart support at that price, and the dividend yield would hit 5%.

It’ll be a while before things turn around for Target and most other retailers, likely when the Fed finally punches the economy into a recession, inflation falls, and we get to the end of the tunnel where things start to rebound.