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Target Corp TGT

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Morningstar’s Analysis

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While Shoppers Continued to Flock to Target in Q2, Shares Fail to Offer Investors a Bargain

Erin Lash, CFA Sector Director

Analyst Note

| Erin Lash, CFA |

We don’t expect to materially alter our $151 fair value estimate for no-moat Target (beyond a low-single-digit rise for time value) after digesting the firm’s stellar second-quarter results. Comparable sales popped 8.9% in the period, an impressive feat on top of the 24% marks chalked up last year. Similar to the sequential quarter, Target’s growth primarily emulated from the store channel (which boasted comps of 8.7% on top of 10.9% gains a year ago), showcasing that consumers are returning to brick-and-mortar outlets as vaccination rates have increased. However, sales through the digital channel are continuing to outpace prepandemic levels (around 17% of total sales, up 1,000 basis points relative to 2019), which we think illustrates consumers’ desire for convenience. We recognize that this could manifest in increased fulfillment costs for Target over time, though, compelling the retailer to expend resources to continuously enhance its omnichannel service offering. Although this top-line growth came with modest contraction at the operating margin line (down 20 basis points relative to the second quarter of fiscal 2020 to 9.8%) in the quarter, we attribute this degradation to higher merchandising and freight costs--factors that are eating into profits for firms across a vast array of industries.

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Company Profile

Business Description

With 1,897 stores (as of the end of fiscal 2020), Target is a leading American general merchandise retailer, offering a variety of products across several categories, including beauty and household essentials (26% of fiscal 2020 sales), food and beverage (20%), home furnishings and décor (20%), hardlines (18%), and apparel and accessories (16%). Most of Target’s stores are large, averaging nearly 130,000 square feet. The company has a significant e-commerce presence, deriving around 18% of sales from the channel (up from about 9% in fiscal 2019, before the pandemic). In addition to its namesake stores, Target owns Shipt, an online same-day delivery platform. After it exited Canada in 2015, virtually all of Target’s revenue is generated from the United States.

1000 Nicollet Mall
Minneapolis, MN, 55403
T +1 612 304-6073
Sector Consumer Defensive
Industry Discount Stores
Most Recent Earnings Jul 31, 2021
Fiscal Year End Jan 29, 2022
Stock Type Aggressive Growth
Employees 409,000