Ahead of earnings and a key investor day on March 1, Target’s stock (TGT) is getting slapped with a rare Underperform rating by one veteran retail analyst.
“We believe that Target is likely to exceed printed Street EPS estimates for 4Q (we model $2.88 vs Street at $2.85), but this is not a call on the 4Q results. Our concern is that the CY22 EBIT margin guide is likely to be in the 7-8% range, implying downside to the Street’s 7.9% outlook,” said EvercoreISI retail analyst Greg Melich.
Melich now sees Target as a “tactical under-perform” into the aforementioned events.
To say a negative rating of any kind on Target is a rarity is an understatement.
Out of 34 sell-side analysts on Wall Street who cover the stock, 70.6% rate it a Buy, according to Bloomberg data.
The optimism on Target reflects impressive results over the past two years of the pandemic as CEO Brian Cornell has moved quickly to improve merchandise in-stocks, expand assortments into more fresh food and drive margin-protecting operational efficiencies.
The company has also gained high marks on the Street for its same-day delivery service Shipt, which has allowed Target to win away market share from traditional grocery stores.
Target shares are up 78% in the past two years per Yahoo Finance Plus data, outperforming the S&P 500’s 32% advance. Shares of Walmart and Costco are up 13% and 65%, respectively.
But, Melich has his concerns on the stock at current price levels.
“Target has done a great job of driving traffic growth and the two-year comp sales stack is in the mid-30% range; however, comparisons are becoming tougher to cycle and we look for promotions and gross margin rate to normalize. With inventory availability improving, apparel and home (traditionally 35-40% of sales and 55-60% of profit) are likely to see increased markdown, as traditional clearance activities should resume in 2H22. Ocean freight and labor expense are two well-documented near-term headwinds for Target and peers, and while we believe that Target is ahead on labor investments, (Amazon, Walmart) will ultimately limit pricing power,” Melich says.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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