Why We Revised Our Price Estimate For Target To $69

We recently revised our price estimate for Target upwards to $69, which is still marginally below the current market price, on account of higher expected revenue and earnings per share estimates. Target is looking to overhaul its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management, with an estimated investment of more than $3 billion in 2018. The company’s struggle to grow its comparable store sales has been the primary investor concern for the past few years, which was largely driven by declining traffic and lower average transaction amounts at its brick and mortar stores. However, the company has been able to grow its comparable sales in 2017, despite significant competitive pressure, suggesting that its initiatives are resonating well with customers.  Accordingly, we have adjusted our forecasts to reflect the current trends.

We have revised our net income estimate for 2018 from $2.5 billion to $2.8 billion. The average share count of 547 million gives us earnings per share of $5.14. Further, we have also slightly reduced our estimate for Target’s trailing twelve-month P/E multiple to 13.5 from a previous 13.8, which – when combined with the estimated EPS – gives us price estimate of $69. Our price estimate for Target’s stock is slightly lower than the current market price. Our interactive dashboard details our forecasts and estimates for the company. You can modify the interactive charts in this dashboard to gauge the impact changes in individual drivers for Target can have on our price estimate for the company.

Focus On Small-Format Stores

Target plans to open more than 30 small format stores, in addition to fulfillment options, into new markets across the country, including Drive Up and the same day delivery enabled by the Shipt acquisition. Accordingly, we have raised our 2018 estimate for Target’s gross profit by $2 billion to $21.6 billion. This is a result of us raising our net revenue forecast by 6% compared to our previous forecast, and a 4% increase in the cost of sales forecast.

Based on the above estimates, and our adjustments to operating expenses, we have raised our forecast for Target’s operating income by nearly $400 million to $4.8 billion for 2018. We expect a slight change in our SG&A cost forecast and we have adjusted the forecast for depreciation and amortization expenses slightly upwards to $2.4 billion. In addition, Target expects its interest expense to decrease about $60 million this year, reflecting last year’s debt retirement and refinancing activities. Overall, these adjustments have resulted in a more than 10% jump in our net income forecast.

Target saw its stock decline nearly 10% in 2017, but is now up about 10% year-to-date as of April 11. In 2018, Target will be impacted from continued cost pressure from the rapid rollout of its new fulfillment options, ongoing wage investments in the face of a tight labor market across the U.S., and the impact of last year’s price and value investments. However, these pressures are expected to be mostly offset by multiple tailwinds in the company’s business, including the mix benefit of continued strength in high margin categories, lower unit costs for digital fulfillment, modest operating leverage from a low single-digit increase in comparable sales, and continued cost control across its business. Overall, we expect relatively small changes in gross margin and SG&A in 2018.

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.