VALUATION HIGHLIGHTS
- Target U.S. constitutes 100% of the Trefis price estimate for Target's stock.
WHAT HAS CHANGED?
- Target Q4 2024 Snapshot
Target exceeded Wall Street's Q4 2024 expectations.
However, Target's Q4 results reflected a challenging retail environment, with revenues declining 3% year-over-year (y-o-y) to $31 billion. While total comparable sales rose 1.5%, this was driven by an 8.7% surge in digital sales, which offset a 0.5% decline in store sales. Gross margin contracted 40 basis points to 26.2% due to increased promotional activity and clearance markdowns, while operating margin fell 110 basis points to 4.7%. Despite achieving $2 billion in efficiency savings over two years, the operating margin compression is a concern. Q4 GAAP and Adjusted EPS dropped 19% y-o-y to $2.41. Looking ahead, Target's sales trends may remain sluggish in the near term, driven by weak demand for certain product lines.
Target is expanding its offerings through strategic partnerships with Champion and Warby Parker, set to launch in the second half of 2025. These collaborations aim to boost sales, attract new customers, and enhance competitiveness with exclusive sportswear and eyewear lines. Additionally, Target saw significant traction in its same-day delivery service, with over a 25% increase in Q4, driven by its Target Circle 360 subscription tier. This tier offers unlimited free same-day delivery for orders over $35, along with free two-day shipping and other perks, for an annual fee of $99. As the company looks to enhance its loyalty program further, it is exploring new benefits to lure customers away from Amazon and Walmart.
Note: Target's FY'24 ended on February 1, 2025.
- Looking Ahead
Target's Q1 2025 guidance is cautious, echoing Walmart's concerns about a slower-than-expected start to the year. Weak February sales, persistent consumer caution, and looming tariff concerns are clouding Target's Q1 profit outlook, with the retailer bracing for significant y-o-y profit pressure. The company's management noted that President Trump’s 25% tariffs on Mexican imports could also force the company to raise prices on produce like bananas, strawberries, and avocados in the coming days. For FY 2025, Target anticipates modest 1% sales growth and nearly flat comparable sales, with earnings per share projected between $8.80 and $9.80. This outlook follows a marginal decline in FY2024, where revenues totaled $106.6 billion and earnings came in at $8.86. The retailer's shift toward lower-margin essentials, driven by inflation, high interest rates, and intense competition, negatively impacted FY'24 results.
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 $437 in 2021 to $431 in 2024, negatively impacted by product mix, merchandising strategies, and overall market dynamics. Going forward, we expect this figure to grow gradually, 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 $447 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 6% 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 2,050 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 2,160, there can be an upside of about 5%. 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 2024 through selling apparel, electronics, housewares, groceries, and other products. It had 1,978 U.S. stores under operation as of the end of 2024.
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.
