Target Set Up For a Strong Holiday Season
We plan to raise our fair value estimate for the no-moat company after a strong third quarter.
Our $107 fair value estimate for no-moat Target (TGT) should rise by a high-single-digit percentage after it posted third-quarter results that easily beat our forecasts. We believe the performance bodes well for the holiday season but still expect results to revert to our long-term forecast (low-single-digit percentage sales growth and 6% adjusted operating margins) once the pandemic eases, likely in mid-2021.
Third-quarter comparable sales rose 20.7%, well above our 9% target, driven by ticket size (up 15.6%) and traffic growth (4.5%) as customers continued to consolidate trips but visited Target stores and digital properties more often. Although digital sales contributed 11 points of comparable growth, we are encouraged by Target’s 10% in-store mark. With October seeing a similar overall growth rate, we expect momentum should carry into the holiday season, particularly as Target capitalizes on an expanded drive-up and pick up in store assortment. Cost leverage led Target’s adjusted operating margin up more than 300 basis points, to 8.5%, despite pandemic costs and higher wages.
With management refocusing on enhancing its assortment (through partnerships including an agreement to add Ulta outposts to 100 Target stores in 2021) and the current sales surge suggesting that the firm has ample capacity to continue fulfilling online orders via its stores, we believe Target has room for long-term growth. But our skepticism on its current valuation stems from a retail environment that should return to intense price competition after the pandemic eases (promotional pressure has abated amid the 2020 sales surge) and the limited ways in which sellers can secure customer loyalty, particularly when shoppers can check the competition’s pricing and availability in-store. These factors contribute to our no-moat rating, and we caution long-term investors to not lose sight of the challenging, more durable parts of the competitive environment amid the pandemic’s fleeting sales surge.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.