Going Into Earnings, Is Target Stock a Buy, a Sell, or Fairly Valued?

Target TGT is set to release its first-quarter earnings report on May 21. Here’s Morningstar’s take on what to look for in Target’s earnings and stock.

Key Morningstar Metrics for Target

• Fair Value Estimate: $135.00
• Morningstar Rating: ★★★★
• Economic Moat: None
• Morningstar Uncertainty Rating: Medium

Earnings Release Date

• Wednesday, May 21, before the start of trading

What to Watch for in Target’s Q1 Earnings

• Comments from management regarding consumer relief: Management noted that revenue and profits should be under pressure in the first quarter, due to a tumultuous economic backdrop and uncertainty regarding tariffs. Indeed, we expect comparable sales to decline by a low-single-digit percentage in the quarter. More importantly, we’ll be interested to see if management cites any signs of consumer relief—most notably in discretionary categories like apparel, electronics, and home goods—which could potentially bode well for a rebound in comparable sales growth in the second quarter.
• High-frequency goods: We expect demand for discretionary items to be pressured in the quarter. However, Target’s food, beverage, household essentials, and beauty categories tend to be less volatile. We’ll look to see if the firm continued growing these categories, which would be a good sign for long-term customer retention.
• Changes to full-year guidance: Last quarter, management issued full-year guidance, calling for 2025 EPS of $8.80-$9.80. However, this implies an improvement in operating performance as the year progresses. We will see if management’s outlook for the year changes due to a choppy economic landscape.

Fair Value Estimate for Target

With its 4-star rating, we believe Target stock is undervalued compared with our long-term fair value estimate of $135 per share. Results came in better than we anticipated as comparable sales expanded 1.5% (outpacing our forecast for flat growth) and operating margin of 4.7% exceeded our 4.3% estimate. Despite the positive marks, management’s sales guidance for fiscal 2025 was tepid, with comp sales expected to be roughly flat versus our forecast for a 2.5% gain. We revised our forecast to align with management’s outlook, which offset benefits from the time value of money and the firm’s solid fourth quarter results. Our fair value estimate implies a forward fiscal 2025 adjusted P/E of about 15 times.

We continue to take a conservative view regarding Target’s long-term growth and margin trajectory. In early 2022, management set a long-term target for mid-single-digit top-line growth and an operating margin of at least 8%, though management has pared back its margin outlook. While we are encouraged by Target’s investments over the past several years to build out its digital fulfillment capabilities and develop trendy brands to drive market share gains across product categories, we view its sales aims as ambitious, given the highly competitive retail industry.

Read more about Target’s fair value estimate.

Economic Moat Rating

We do not believe Target warrants an economic moat. Despite its iconic and trendy brand, we view the firm’s position in the hyper competitive retail environment as rather ambiguous, which dilutes our confidence in the durability of its brand to drive consistent store traffic. Furthermore, we don’t see sufficient evidence to award Target a cost advantage. Although it is the nation’s seventh-largest retailer, we do not believe the firm exhibits irreplicable scale across its individual product categories that would suggest it has amassed negotiating prowess over its supplier partners.

Read more about Target’s economic moat.

Financial Strength

After four years in which it saw its top line balloon by nearly 40%, Target finds itself in a strong financial position, with a conservative debt ratio (net debt/2024 EBITDA stood at 1.1 times) and ample liquidity. As of fiscal 2024 year end, the retailer had about $16 billion in debt and finance leases and held $4.8 billion in cash (plus $4 billion in an untapped revolving facility). This is consistent with its past mantra, as the company has prioritized operating with a strong balance sheet for more than two decades (net debt/EBITDA has averaged 1.6 times since 2000).

Read more about Target’s financial strength.

Risk and Uncertainty

We assign Target a Medium Uncertainty Rating. The rise of digital penetration serves as a formidable threat to Target’s traditional brick-and-mortar retail model. Price shopping has become rather seamless as consumers increasingly begin their product searches via digital channels, making Target susceptible to price competition amid an industry where consumers face virtually no switching costs.

The retail industry’s preemptive leaders—Walmart WMT and Amazon AMZN—boast unrivaled scale and an impressive ability to invest in supply chain automation to mitigate costs. We expect Walmart and Amazon to serve as disinflationary forces in the industry for years to come, putting pressure on retailers that lack a differentiated product offering, vast scale, or a concentrated geographic focus.

Read more about Target’s risk and uncertainty.

TGT Bulls Say

• Given its iconic brand that attracts consumers due to its promise of a more gratifying customer experience compared with other low-cost retailers, we are confident in Target’s ability to drive recurring foot traffic.
• Based on its performance during the pandemic, we view Target as a formidable online retailer, putting to rest many concerns about its ability to compete in a digital retail environment.
• Target is poised to benefit from the continued decline of mall-based competition and department stores, which will drive strong growth in comparable sales.

TGT Bears Say

• Target lacks the scale and differentiation to drive significant market share across its product categories, since its product offerings lack a clear value proposition.
• Despite being the nation’s seventh-largest retailer, Target must constantly invest in cost-saving initiatives, product innovation, and store renovations just to keep up with behemoths Walmart WMT and Amazon AMZN.
• Target’s higher-margin discretionary product categories, such as apparel and home furnishings, are susceptible to losing market share via digital retail penetration, which could weaken the firm’s margins.

This article was compiled by Gautami Thombare.