TGT Stock Up 21% YTD, What’s Next?

Note: TGT’s fiscal 2023 ended on Feb 3.

After a 21% increase year-to-date, at the current price of around $172 per share, we believe Target (NYSE: TGT), the second-largest discount chain in the U.S. – is fairly priced. TGT stock rose from around $142 to nearly $172 YTD, compared to a 9% growth in the S&P index. Target’s shares have spiked so far this year in hopes of an impending growth rebound after seeing a shifting consumer sentiment and slowing company sales in 2023. The retailer’s FY’23 results showed the company making progress on margins despite weak sales, and investors are cheering for the expected return to grow in 2024. The retailer finished 2023 with $106 billion in revenues, down 2% year-over-year (y-o-y) – its first fiscal year with declining sales since 2016. TGT’s comparable sales fell 3.70% in 2023, reflecting weak demand for discretionary goods like apparel, electronics, and home goods, which make up the majority of Target’s revenue. While sales are still weak, its profitability has improved significantly. The company’s gross margin rose from 24.6% in FY’22 to 27.6% in FY’23, reflecting lower markdowns and falling expenses related to freight and supply chain, and its operating margin improved from 3.5% in FY’22 to 5.3% in FY’23. As a result, the retailer’s full-year 2023 earnings per share (EPS) came in at $8.94, up 50% from the prior-year period. The retailer is demonstrating that it can deliver solid profits even in times of weaker demand, and investors are applauding its better-than-expected results. Having said that, the company’s next few quarters could show sluggish sales trends that reflect weak demand for some key product lines. We expect the company shares to likely remain under pressure in the short term.

TGT stock has seen little change, moving slightly from levels of $175 in early January 2021 to around $172 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. Overall, the performance of TGT stock with respect to the index has been lackluster. Returns for the stock were 31% in 2021, -36% in 2022, and -4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TGT underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TGT face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We forecast Target’s Revenues to be $107.9 billion for the fiscal year 2024, up marginally y-o-y. Looking at the bottom line, we now forecast the adjusted earnings per share (EPS) to come in at $9.42. Given the changes to our revenues and EPS forecast, we have revised our Target’s Valuation to $178 per share, based on a $9.42 expected EPS and an 18.9x P/E multiple for the fiscal year 2024. This means that our estimate is in line with the current market price. The stock is still down significantly from the all-time high it set in late 2021.

Looking ahead, the company anticipates a 3% to 5% comparable sales decline in the fiscal first quarter, and earnings per share in the range of $1.70 to $2.10, compared to its EPS of $2.05 in Q1 2023. For the full fiscal year, it is guiding for comparable sales in the range of flat to up 2%, and earnings per share of $8.60 to $9.60, TGT announced a new subscription tier called Target Circle 360 that will include unlimited free same-day delivery for orders over $35 in one hour with no delivery fees and free two-day shipping, on top of all other perks – at the cost of $49/year. The company is looking into adding new benefits to entice Amazon and Walmart customers.

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.

[1] Returns as of 4/8/2024
[2] Cumulative total returns since the end of 2016