Target Post-earnings Analysis
Shares of the big-box retailer Target fell after the company lower store traffic and a slight miss on gross margins. The stock is now down more than 60% from its five year highs, but as it trades near the 2020 pandemic crash lows, the question becomes whether or not it is worth investing into.
Where the trouble started:
Over the past five years, Target has had to deal with changing consumer behavior. As inflation eroded consumer spending abilities, they turned to cheaper alternatives like the Walmarts and discount stores available. Target’s heavy reliance on discretionary items (like apparel and decor) became a burden and backfired amid cautious, inflation-hit spending. To battle this, the company was forced to incur markdowns, resulting in reduced operating margins. To make matters worse, the company faced severe pressure from tariffs. With roughly 50% of its goods imported, Target would need to raise prices more than double of that of Walmart to make up for the difference.
Target used to have an appeal to it, after all, it was well know as “Tarzhay” to their loyal fan base. But a series of misaligned campaigns eroded customer trust and value perception. The company’s brand appeal was lost in their implementation of DEI practices in 2023. Then their rollbacks eroded the trust even more, losing customers on both side of the issue.
The numbers:
Although Target’s revenue fell in the years following 2022, it only dipped from $109 billion to about $107 billion, still at about record levels. They did see a severe blow to net income in 2022, when it fell by 60% from the previous year, but that’s bounced back to about $4 billion in the past two years (each). The main issue remains their operating margins, which have gotten slimmer over the years and as the company faced tariff pressures and supply chain issues.
Target’s latest numbers are as follows for the quarter:
- Earnings per share: $2.05 vs. $2.03 expected
- Revenue: $25.21 billion vs. $24.93 billion expected
This performance shows Target’s sales are down 1% from the year before, and their net income of $935 million is also down from the same period last year of $1.19 billion. Same store sales decreased by 1.9% year over year. This is a key metric for a brick and mortar business, and unfortunately Target’s same store sales have been struggling since early 2023.
The opportunity:
Target’s biggest opportunity is in earnings their customer’s trust and loyalty back. The company DID generate $25 billion last quarter and that stands for something. The temporary slowdown and operational challenges can be fixed with that much revenue, but they must be creative in doing so. Target’s focus on digital sales is helping, with the number rising 4.3% year over year. Other programs like Roundel (its membership program) have contributed to 14.2% growth year over year.
Valuations:
Target’s trailing P/E (TTM) is approximately 12x, notably lower than the historical averages of around 16-18x. The company also trades at a P/E far lower than industry peers, who trade around 27-31x.
Using an “optimistic” discounted cash flow (DCF) model, one model estimates Target’s fair value is around $165 per share, which implies the stock is 36% undervalued. But optimism alone can’t save a company. Target needs to get back to growth, because as the saying goes “if you’re not growing, you’re dying”. No matter how “undervalued” it may seem, Wall Street needs to see the turnaround story in the numbers to take a bigger position in the company.