VALUATION HIGHLIGHTS
- Target U.S. constitutes 100% of the Trefis price estimate for Target's stock.
WHAT HAS CHANGED?
- Target Misses Estimates in Q3
The company missed third-quarter revenue and earnings estimates and slashed its full-year guidance. The company pointed to softness in discretionary categories as one primary source of the quarter's shortfall. There were also costs associated with accelerating inventory purchases in anticipation of the port workers strike last month. Target’s fiscal third-quarter net income tumbled about 12% to $854 million, or $1.85 per share, from $971 million, or $2.10 per share, in the year-ago quarter. Revenue rose to $25.67 billion from $25.40 billion in the year-ago period.
Customer traffic across Target’s stores and website increased 2.4% year-over-year (y-o-y). Digital sales were a bright spot, growing 10.8% y-o-y because of double-digit gains with curbside pickup and almost 20% increases with same-day home deliveries. Comparable store sales, however, declined 1.9% y-o-y in Q3.
Note: Target's FY'23 ended on February 3, 2024. Q3 FY'24 refers to the quarter that ended on November 2, 2024.
- Guidance
The big-box retailer reversed course and cut its full-year profit guidance, just three months after hiking that forecast. It said it expects full-year adjusted earnings per share to range from $8.30 to $8.90. That’s lower than the $9.00 to $9.70 per share range that it shared in August 2024.
Target now expects fourth-quarter comparable sales to be approximately flat.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Target's value that present opportunities for upside or downside to the current Trefis price estimate for Target:
- Target's Average U.S. Revenue per Square Foot: Target's average U.S. revenue per square foot increased from $325 in 2019 to $447 in 2023. Going forward, we expect this figure to rise, driven by the company's small store expansion, rewards program, and improving online sales. We currently forecast Target's revenue per square foot to reach $450 by the end of our forecast period. However, if the average revenue per square foot grows faster than expected due to strong online sales, reaching $470 by the end of our forecast period, there could be a 5% upside to Target's stock price.
- Total Number of Target U.S. Stores: The total number of Target stores has increased consistently, driven in large part by the small-format stores.
We forecast that the retailer's store count will reach around 2,040 by the end of our forecast period. However, if Target manages to expand more rapidly without losing average sales per store, and its store count reaches 2,220, there can be an upside of about 8%. This could happen if it penetrates more urban markets with smaller format stores.
For additional details, select a driver above or select a division from the interactive Trefis split for Target at the top of the page.
BUSINESS SUMMARY
Target Corporation is among the ten largest retailers in the U.S. by sales. Target generated around $107 billion in revenues in 2023 through selling apparel, electronics, housewares, groceries, and other products. It had 1,956 U.S. stores under operation as of the end of 2023.
KEY TRENDS
Threat of self-cannibalization due to massive size
Like any retailer, Target's long-term sales and income growth depend largely on the company's ability to open new stores and expand into new markets. However, due to Target's size, it runs the risk of cannibalizing its sales in the US.
Greater focus on groceries to improve store traffic
Consumer spending on groceries can be classified as non-discretionary and is, therefore, less correlated to macroeconomic factors. Target has focused on growing its grocery business due to its non-discretionary nature, in addition to the fact that many customers still prefer to buy groceries in stores rather than online. However, the grocery segment is a relatively low-margin business.
Growth in e-commerce
Target's online sales do not contribute much to its overall revenues, but they have been growing at a robust pace. We expect this to continue, with the e-commerce business eventually becoming a substantial contributor to the company's overall revenues.
