Why Fin Pros are Bullish on Target

Target (TGT) lost its mojo in the post-pandemic era.

The retailer that could do no wrong struggled to keep its shelves stocked, plagued by supply chain shortages and theft.

Things got so bad the company began to close stores to save money.

But maybe that’s all behind them.

The company’s latest earnings report showed significant progress in EBIT margin, inventory management, and sales forecasting.

Unsurprisingly, shares ripped higher as search volume by financial pros spiked, according to our TrackStar data.

So, does this signal a buying opportunity or is this just a dead cat bounce?

Here’s what we know.

Target’s Business

In the bustling world of retail, Target stands out for its red bullseye logo and its over-a-century-long legacy of innovation and customer satisfaction. 

Today, the company operates over 1,956 stores across the U.S., with small store footprints to all-in-one shopping centers.

At its core, TGT is a one-stop shop for millions seeking a wide range of products—from clothing and home goods to groceries and electronics.

The company caters to the evolving needs of its customers with services like in-store pickup, drive-up, and same-day delivery. 

This blend of convenience and variety, coupled with its focus on exclusive brand partnerships, makes TGT a favorite among consumers.

During the latest call, Target announced its subscription tier called Target Circle 360, which will include unlimited free same-day delivery for orders over $35 in as little as one hour with no delivery fees and two-day free shipping, on top of other perks.

Source: Target Q4 2023 Investor Relations

Sales continued to decline Year-Over-Year. However, operating margin improved to 5.8% from 3.7% the year prior. Traffic declines also slowed from -4.1% in Q3 to -1.7% in Q4.

Same-day sales services also grew 8% YoY, while Drive-Up increased by double digits.

Financials

Source: Stock Analysis

While revenues slid 1.6% YoY, gross margins jumped 3% to 27.6%.

Total inventory dropped 12% from a year earlier, a huge improvement.

However, SG&A’s percentage of revenue increased slightly.

The big news was that the company generated $8.6 billion in cash from operations, the same as in 2022. After that, the number dropped by more than half last year.

Overall, the company is on the right track. It’s kept debt at $19.6 billion while paying out $2 billion in dividends, though it largely suspended stock buybacks.

Valuation

Source: Seeking Alpha

Target is certainly cheap compared to its peers.

Walmart (WMT) trades at 31.6x earnings, while Costco (COST) trades at 53.6x.

Similarly, Target trades at 9.2x cash, while Walmart and Costco trade at 13.6x and 26.6x cash, respectively. Even Dollar General (DG) trades at higher multiples.

But as you’ll see, it all comes down to growth.

Growth

Source: Seeking Alpha

Every other retailer, besides Big Lots (BIG) and Target, saw positive growth last year and expects the same this year.

True, it’s not much more than the mid-single digits. But it’s better than Target’s 0.6% forward growth estimates.

Interestingly, all have seen free-cash-flow pinched in the last few years.

Profitability

Source: Seeking Alpha

Profit-wise, Target’s gross margins are back near the top as are its EBIT margins.

This highlights the company’s improvement in cost controls. They just need to keep these in place while finding growth.

Our Opinion 7/10

We don’t think Target is going away anytime soon. And if they can figure out how to grow profitably, shareholders will reward them.

However, the risk/reward on this stock isn’t high. 

At best, we can see 25%-30% upside but just as much downside. That’s not really our cup of tea.

Back near $150, that changes.

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