Target Stock Down 32% This Year, What’s Next?

After a 32% decline so far this year, at the current price of around $157 per share, we believe Target (NYSE: TGT), the second-largest discount chain in the U.S. – could see gains in the long term. TGT stock has declined from around $232 to near $148 year-to-date, compared to a 26% fall in the S&P index. The stock decline during this period can be attributed to the disappointing earnings in the fiscal first half of 2022 – driven by a slowing economy, supply chain worries, and shifting consumer sentiment. Target’s accelerating promotions to help resolve a mishandled inventory situation from earlier this year, and higher spending on fuel, freight, transportation, and increased compensation in distribution centers weighed heavily on the company’s profitability. Consequently, the company’s Q2 EPS was down to just 39 cents per share from $3.64 in the quarter a year ago. Despite rising costs, Target’s revenue rose 3.5% y-o-y to $26 billion in its Q2 on the back of a 2.6% increase in comparable sales. TGT’s traffic rose almost 3% (on a 13% spike last year) in Q2, whereas Walmart (NYSE: WMT) posted a mere 1% traffic increase, and Home Depot (NYSE: HD) saw declining traffic during the same period. Target’s customer-traffic metric shows that the company is still able to retain the interest of its shopper base.

In Q2, Target’s gross and operating margins fell to 21.5% and only 1.2%, respectively, down from 30.4% and 9.8% in the year-ago quarter – as a result of markdowns that were necessary to clear out inventory in previously popular categories like home furnishings. As of July 30, Target had $15.3 billion of merchandise, more than $4 billion higher than the $11.3 billion it held at the same time the year before. Going forward, the retailer is expecting a lower fall inventory peak than its spring peak, even though the stock-up preceding the holiday season is usually the largest, suggesting the worst of the inventory challenges might be over.

Target’s management is projecting that profit margins will recover to about 6% of sales in the year’s second half. We forecast Target’s Revenues to be $110 billion for the fiscal year 2022, up 4% y-o-y. Looking at the bottom line, we now forecast the earnings per share (EPS) estimate to come in at $8.10. Given the changes to our revenues and EPS forecast, we have lowered Target’s Valuation to $173 per share, based on an $8.10 expected EPS and a 21.3x P/E multiple for the fiscal year 2022. This means that our estimate is 10% higher than the current market price. It should be noted that even after the stock plunge this year, TGT stock has still doubled over the last three years and tripled over the last five. In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but any further decline in the company’s stock could be seen as an opportunity to buy.

FAO Schwarz and Target signed an exclusive agreement where the popular toy brand will only be available at Target stores and Target.com outside of FAO Schwarz stores. During a time when consumer discretionary spending is being pressured by high inflation, Target is hoping agreements like this one will help drive traffic. To add to this, toy demonstrations are also being planned throughout the holiday season as part of this multiyear deal. Target is also hiring 100,000 new workers for its stores and fulfillment centers, the same amount it hired at the end of 2021, to prepare for the holiday season.

It is helpful to see how its peers stack up. TGT Peers shows how TGT stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

With inflation rising and the Fed raising interest rates, TGT stock has fallen almost 36% this year. Can it drop more? See how low can TGT stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

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[1] Month-to-date and year-to-date as of 10/5/2022
[2] Cumulative total returns since the end of 2016