We came across a bullish thesis on Target Corp (TGT) on ValueInvestorsClub by FishTaco. In this article we will summarize the bulls’ thesis on TGT. Target shares were trading at $172.00 when this thesis was published, vs. closing price of $153.42 on Aug 29.
A woman shopping in one of the company’s retail stores, searching for the perfect item.
Target Corporation, a major player in the U.S. retail sector, stands out as the sixth largest retailer by revenue and the third largest general merchandise merchant behind Walmart and Amazon. With nearly 2,000 stores and over 246 million square feet of selling space, Target has established a robust presence across the nation. Unlike Walmart, where grocery sales dominate, Target’s revenue composition reflects a more balanced approach, with grocery accounting for 22% of its revenue and the remaining portion driven by discretionary categories.
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The company’s revenue model is diverse, encompassing a wide array of products ranging from apparel and home furnishings to beauty products and groceries. This broad product range helps Target cater to a wide demographic, making it a one-stop shop for many consumers. Despite facing significant challenges over the past few years, Target’s unique positioning in the retail landscape offers compelling reasons to consider its stock as a solid investment opportunity.
In the early stages of the pandemic, Target saw a surge in sales as consumers, confined to their homes, turned to online shopping and stocked up on general merchandise. This boost was evident as online sales doubled, rising from 12% to 22% of total revenue, and the company’s EBIT margin improved substantially from 6% to nearly 10%. However, the post-pandemic landscape has presented new hurdles. By FY22, Target faced a mix of inventory issues and shifts in consumer spending towards necessities, which pressured margins and impacted growth rates.
Target’s decision to aggressively discount excess inventory in response to overstock and supply chain delays in 2022 had a notable impact on its margins, which dropped significantly. Although the company faced traffic declines and controversies, particularly regarding its Pride merchandise in 2023, these challenges are expected to be temporary. The company’s traffic trends are indicative of cyclical issues rather than a fundamental decline in its business model. Historical data suggests that previous traffic dips, driven by events like a credit card breach or policy decisions, were followed by recoveries.
Looking ahead, Target is poised for a rebound. The company’s inventory levels are now normalized, and the adverse effects of excessive discounting have largely faded. With traffic expected to improve as the company laps the previous year’s issues, Target’s margins are set to recover. The company is also addressing shrinkage—a growing concern across the retail sector—with measures such as store closures in high-theft areas and enhanced anti-theft strategies. These actions are likely to mitigate some of the margin pressure caused by theft.
Moreover, Target’s management has introduced a significant cost savings initiative, aiming to realize $2 billion to $3 billion in efficiencies over the next two years. This program could contribute an additional 100 to 200 basis points of margin improvement, further enhancing profitability. Combined with a favorable macroeconomic outlook and potential improvements in consumer spending, these factors create a strong case for Target’s stock.
Currently trading at 16.5 times consensus earnings, Target’s valuation appears reasonable compared to its industry peers. Given the anticipated earnings revisions and margin expansion, Target’s stock presents an attractive opportunity. The potential for a re-rating of the stock, coupled with a solid recovery in traffic and profitability, supports a positive investment thesis for Target.
In conclusion, despite recent challenges, Target’s strategic measures and market positioning suggest a promising outlook. As the company continues to address past issues and benefit from improving market conditions, its stock offers a compelling investment opportunity with significant upside potential.
TGT is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 68 hedge fund portfolios held TGT at the end of the first quarter which was 60 in the previous quarter. While we acknowledge the potential of TGT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as TGT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.