Why Did Target Stock Jump 10%?

Target (NYSE: TGT) stock rose 10.3% on 21st August, as compared to a 0.4% increase in the S&P 500 index. While Target’s single-day performance stood out, overall sentiment toward retailer stocks was buoyant as indicated by a sharp increase in stock price for some of Target’s peers too, including TJX Companies (NYSE: TJX) which was up 6.1% and Ross Stores (NASDAQ: ROST) which gained 4.2%. Notably, though, several of Target’s peers such as Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), and Costco (NASDAQ:COST) saw their stocks gain less than 1%.

What provided the tailwinds and is the current valuation sustainable?

TGT stock price increased after the company announced its second-quarter results, beating the revenue estimates and issuing higher-than-expected financial guidance for Q3 and the overall fiscal year. Earlier, the company had embarked upon a cost-cutting strategy and the effect of the same might be bearing fruit as indicated by a 1.6% expansion in its operating margin in Q2 (36.6% increase in absolute operating income) as compared to a year back. Notwithstanding the increase, at its current price of $159, TGT stock is at a comparable level as against its fair value of $160 – Trefis’s estimate for Target’s valuation – valued at an adjusted full-year estimated EPS of $9.35, which is close to the median company guidance. 

Does TGT stock look attractive now?

Amid the current economic scenario and before the single-day upsurge, TGT stock has seen little change, moving slightly from levels of $143 in early January 2024 to around $145 on August 20, 2024, vs. an increase of about 17% for the S&P 500. Overall, the performance of TGT stock with respect to the index has been quite volatile. 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 other heavyweights in the Consumer Staple sector including ROST, TJX, and COST, and even for the megacap stars WMT, and AMZN. 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?

What do the fundamentals indicate?

The company posted total revenue of $25.5 billion in the second quarter – up 2.7% y-o-y. It was driven by an 8.7% increase in digital sales and a 0.7% increase in store sales. Notably, TGT’s number of transactions grew by 3% as against a 4.8% contraction in the corresponding quarter a year back. On the cost front, the operating expenses as a % of revenues decreased sharply in Q2, leading to an operating margin of 6.4% vs 4.8% a year back. Consequently, TGT’s net income increased by 43% (y-o-y) to $2.58 billion during the quarter.

TGT’s performance in Q2 is in sharp contrast with its performance in Q1. For the first six months of FY2024, TGT’s top-line contracted by 0.2% y-o-y to $49.98 billion as a result of its reported contraction in store sales by 2.1%. Overall performance of the top line benefited somewhat from a 5% increase in its digital sales. Nevertheless, operating income for H1 improved to $2.9 billion from $2.5 billion a year back. That said, most of the improvement in operating income happened in Q2. Altogether, the net income rose by 19.6% to $2.1 billion.

Moving forward, TGT expects its revenues to grow by 0-2% in Q3 FY2024 and a similar growth for the full year. Overall, we estimate Target’s revenues to touch $107 billion in FY2024. Additionally, the adjusted net income margin is likely to see some improvement in the year, resulting in earnings-per-share (EPS) of $9.35. This coupled with a P/E multiple of ~17x will lead to a valuation of $160.

[1] Returns as of 8/21/2024
[2] Cumulative total returns since the end of 2016

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