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Target Corporation (TGT): A Bear Case Theory

We came across a bearish thesis on Target Corporation (TGT) on Kroker Equity Research’s Substack by Kroker Equity Research. In this article we will summarize the bulls’ thesis on TGT. Target Corporation share was trading at $148.44 as of Sept 12th.

A woman purchasing groceries at a Target store, with a cart full of products.

Target Corporation, a leading general merchandise retailer in the U.S., has faced a volatile market environment over the past few years. After reaching a peak stock price of around $250 in 2021-2022, Target's stock plummeted to about $100 in 2023 before rebounding to its current level of approximately $150 per share. The pandemic years saw rapid growth, with net sales increasing by nearly 20% in 2020, fueled by same-store sales and high EBIT margins. However, as economic conditions normalized, so did Target's growth rates, and 2022 marked the beginning of a downturn as inflation, high-interest rates, and geopolitical instability further strained the economy. Target’s significant exposure to discretionary items, which constitute 76% of its sales, compounded these challenges, as tighter consumer finances led to reduced spending. Negative publicity during Pride Month in June 2023 also weighed on sales, pushing margins and returns lower from their 2021 peak levels.

Target’s strategic response involves several key initiatives aimed at driving future growth and profitability. The company has revamped its loyalty program, Target Circle, expanding it with new benefits and membership options to enhance customer engagement. This program has already attracted over 1 million new members in Q1 2024, pushing the total membership above 100 million. The success of this program will depend on its ability to differentiate itself in a market saturated with loyalty offerings. Target is also focusing on expanding its store footprint, with plans to open over 300 new stores in the next decade while continuing to invest in its existing locations to maintain a competitive edge over rivals like Costco and Walmart.

The retailer is also bolstering its digital and advertising capabilities. Roundel, its advertising arm, has become the fastest-growing segment, with revenues increasing by over 20% in Q1 2025, leveraging Target's customer data for targeted advertising. While promising, Roundel's immediate impact on overall revenue and profits is expected to be limited.

Looking ahead to FY 2025, Target forecasts a modest recovery with a projected comparable sales increase of 0% to 2%, along with an EPS range of $8.60 to $9.60. The company aims to drive growth through operational efficiencies, a disciplined approach to inventory management, and continued capital investments, totaling $3 to $4 billion for store openings, remodels, and digital enhancements. Target's dividend policy remains strong, with a history of 53 consecutive years of annual increases and an ongoing $15 billion share repurchase program.

However, despite these efforts, the financial outlook suggests tempered growth. A detailed discounted cash flow (DCF) model, with a 3% revenue CAGR over five years and a normalized EBIT margin of 6%, yields an estimated equity value of $60.4 billion, implying a fair share value of $132, slightly below the current price of $150. Adjusting for varying assumptions, the valuation ranges from $111 in a bear case to $150 in a bull case. Given Target's P/E and EV/EBIT ratios slightly below historical averages, the stock may appear fairly valued or slightly undervalued, but its future growth is likely to remain modest amid strong competition and a challenging retail landscape. Target is expected to stabilize, but with low growth prospects and continued margin pressures, there may be more attractive investment opportunities elsewhere.

Target Corporation is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 52 hedge fund portfolios held TGT at the end of the second quarter which was 67 in the previous quarter. While we acknowledge the risk and potential of TGT as an investment, our conviction lies in the belief that some 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 more promising than TGT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.

Disclosure: None. This article was originally published at Insider Monkey.