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Target Corp. (TGT)

September 12, 2024

Compared to: Walmart, Inc. (WMT) | Costco Wholesale Corp. (COST) | Consumer Discretionary Select Sector SPDR Fund (XLY)

Our reasoning

Target's current valuation appears fair, considering its balanced risk profile and growth prospects. While the company faces challenges such as slowing revenue growth and increasing short-term debt, these are offset by improving profitability, strong cash flow generation, and promising growth initiatives in digital and owned brand expansion. The company's valuation multiples are in line with peers, reflecting a realistic assessment of its market position and future potential.

Key takeaways
  • Target Corp. is a financially healthy company with strong profitability and a conservative capital structure.
  • The company's revenue growth is slowing down, but profitability is improving due to cost control and favorable product mix.
  • The company's liquidity position appears strong, but its reliance on short-term financing could be a concern if the company faces unexpected challenges.
  • The company's overall capital allocation strategy appears to be shifting towards a more conservative approach, with a focus on debt reduction and shareholder returns.
  • The company's future cash flows are expected to remain strong, with continued growth in operating cash flow and a focus on debt reduction.
  • The company's price investment initiatives and continued investment in the Target Circle loyalty program and digital marketplace are expected to drive future growth.
  • Target's valuation is currently in line with its peers, but its future growth prospects and potential catalysts will be key drivers of its valuation.
  • The company's stock price has shown a mixed performance history, with periods of outperformance and underperformance.
  • Target's higher volatility and larger drawdowns suggest a higher risk profile compared to its peers and the benchmark.
  • Overall, Target is a financially sound company with a strong track record of execution. However, its reliance on short-term financing, cautious growth outlook, and intense competition are key risks to monitor.
Fairly valued
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Evaluation summary

  1. Company Overview:

    • Target Corp. operates as a single-segment retailer, selling a wide range of general merchandise and food products through its stores and digital channels primarily in the U.S.
    • Key product categories include Apparel & Accessories, Beauty & Household Essentials, Food & Beverage, Hardlines, and Home Furnishings & Decor.
    • Target's stores fulfill the majority of digitally originated sales, providing convenience for guests and reducing fulfillment costs.
    • Target competes with traditional and online retailers, including department stores, off-price retailers, wholesale clubs, and direct-to-consumer brands.
    • Target's target market is a broad range of consumers, with a focus on value-conscious shoppers seeking a convenient and diverse shopping experience.
    • We will be using Walmart, Inc. (WMT) and Costco Wholesale Corp. (COST) as industry peers for comparative analysis, and the Consumer Discretionary Select Sector SPDR Fund (XLY) as a benchmark for price performance analysis.

  2. Financial Performance:

    • Target's revenue growth has slowed down in recent quarters, indicating a potential slowdown in sales. This could be attributed to the company's recent price investment initiatives, including price cuts on frequently shopped items, and the cautious outlook on near-term growth due to consumer uncertainty and pressure on discretionary spending.
    • Profitability is improving, as indicated by the increasing net income and net margin. This is driven by improved cost control and favorable product mix, as well as improved operational efficiency.
    • The company is facing some challenges in controlling operating expenses, which could impact future profitability.
    • Target's return on average assets (ROA), return on average total equity (ROE), and return on average invested capital (ROIC) have all been improving, indicating improved operational efficiency.
    • Compared to its peers, Target has underperformed in terms of revenue growth, profitability, and key financial metrics like ROA, ROE, and ROIC.

  3. Operational Efficiency:

    • Target's balance sheet reflects a strong financial position, with increasing cash and short-term investments, decreasing long-term debt, and increasing equity.
    • The company's working capital has been decreasing, which could indicate a potential strain on short-term liquidity.
    • Cash flows from core business operations are increasing, indicating strong profitability and efficient working capital management.
    • The company's free cash flow is expected to continue to grow, providing ample resources for future investments, dividend payments, and share repurchases.
    • Target's capital expenditure has been decreasing, while depreciation has been increasing, suggesting a shift towards a more conservative approach to capital allocation.
    • The company's dividend and share repurchase program appears sustainable, given its strong cash flow generation.
    • Compared to its peers, Target has a higher debt-to-equity ratio and leverage ratio, indicating a higher level of financial risk.
    • Target's liquidity ratios, including the current ratio and quick ratio, are relatively strong, suggesting a healthy short-term liquidity position.

  4. Growth Opportunities:

    • Target is focused on expanding its digital capabilities, including its Target Circle loyalty program and Target Plus digital marketplace, to drive future growth.
    • The company is also investing in its supply chain capacity and store remodels to enhance the guest experience.
    • Target is exploring opportunities to expand the reach of its owned brands, such as the launch of Cat & Jack in Canada through a partnership with Hudson's Bay.
    • The company's price investment initiatives, including price cuts on frequently shopped items, are expected to drive future growth by attracting value-conscious shoppers.
    • Management has a history of successfully executing strategic plans, as evidenced by the company's recent performance improvements.

  5. Risks and Threats:

    • The increasing short-term debt and decreasing working capital could indicate a potential strain on short-term liquidity.
    • The company's reliance on short-term financing could be a concern if the company faces unexpected challenges.
    • The company's cautious outlook on near-term growth due to consumer uncertainty and pressure on discretionary spending could impact future profitability.
    • The company's ability to control operating expenses is a key factor to monitor, as increasing expenses could impact future profitability.
    • Target faces intense competition from other retailers, both online and offline, which could erode its market share and profitability.
    • Macroeconomic factors, such as inflation, interest rates, and consumer confidence, could significantly impact consumer spending and Target's results.
    • Regulatory changes related to labor, data privacy, product safety, and other areas could increase Target's compliance costs.
    • Disruptions to the supply chain, vendor relationships, and increases in commodity/freight costs could squeeze margins if not effectively managed.

  6. Valuation Analysis:

    • Target's valuation metrics, such as its price-to-earnings (P/E) ratio and enterprise value-to-EBITDA (EV/EBITDA) ratio, are currently in line with its peers.
    • The company's valuation is expected to be driven by its future growth prospects, including its price investment initiatives, continued investment in its loyalty program and digital marketplace, and expansion of its owned brands.
    • Potential catalysts for Target's valuation include continued improvement in profitability, successful execution of its strategic initiatives, and a favorable macroeconomic environment.

  7. Price Performance:

    • Target's stock price has shown a mixed performance history compared to its peers and the benchmark.
    • While it has outperformed its peers and the benchmark in the short term, it has underperformed in the longer term.
    • Target's stock price has been more volatile than its peers and the benchmark, as evidenced by its higher annualized volatility.
    • Target's beta value is greater than 1, indicating that it is more sensitive to market movements than its peers and the benchmark.

  8. Future Outlook:

    • Target's management is cautious about the near-term growth outlook due to ongoing consumer uncertainty and pressure on discretionary spending.
    • However, the company is confident in its long-term vision and ability to deliver profitable growth.
    • Analyst estimates for Target's future performance are generally positive, with expectations for continued growth in operating cash flow and a focus on debt reduction.
    • Key financial metrics to monitor in upcoming quarters include revenue growth, gross margin, operating margin, net margin, operating cash flow, free cash flow, capital expenditures, cash and short-term investments, long-term debt, total common equity, and working capital.

  9. Summary:

    • Target Corp. is a financially healthy company with strong profitability and a conservative capital structure.
    • The company's revenue growth is slowing down, but profitability is improving due to cost control and favorable product mix.
    • The company's liquidity position appears strong, but its reliance on short-term financing could be a concern if the company faces unexpected challenges.
    • The company's overall capital allocation strategy appears to be shifting towards a more conservative approach, with a focus on debt reduction and shareholder returns.
    • The company's future cash flows are expected to remain strong, with continued growth in operating cash flow and a focus on debt reduction.
    • The company's price investment initiatives and continued investment in the Target Circle loyalty program and digital marketplace are expected to drive future growth.
    • Key financial metrics to monitor in upcoming quarters include revenue growth, gross margin, operating margin, net margin, operating cash flow, free cash flow, capital expenditures, cash and short-term investments, long-term debt, total common equity, and working capital.
    • Target's valuation is currently in line with its peers, but its future growth prospects and potential catalysts will be key drivers of its valuation.
    • The company's stock price has shown a mixed performance history, with periods of outperformance and underperformance.
    • Target's higher volatility and larger drawdowns suggest a higher risk profile compared to its peers and the benchmark.
    • Overall, Target is a financially sound company with a strong track record of execution.
    • However, its reliance on short-term financing, cautious growth outlook, and intense competition are key risks to monitor.
    • Investors should carefully consider these factors before making any investment decisions.
Peer fundamentals 
Fundamentals
Insights
  • Target Corp. is a financially healthy company with strong profitability and a conservative capital structure.
  • The company's revenue growth is slowing down, but profitability is improving due to cost control and favorable product mix.
  • The company's liquidity position appears strong, but its reliance on short-term financing could be a concern if the company faces unexpected challenges.
  • The company's overall capital allocation strategy appears to be shifting towards a more conservative approach, with a focus on debt reduction and shareholder returns.
  • The company's future cash flows are expected to remain strong, with continued growth in operating cash flow and a focus on debt reduction.
  • The company's price investment initiatives and continued investment in the Target Circle loyalty program and digital marketplace are expected to drive future growth.
  • Key financial metrics to monitor in upcoming quarters include revenue growth, gross margin, operating margin, net margin, operating cash flow, free cash flow, capital expenditures, cash and short-term investments, long-term debt, total common equity, and working capital.
Analysis
  • Revenue - Revenue growth is slowing down, indicating a potential slowdown in sales. This could be attributed to the company's recent price investment initiatives, including price cuts on frequently shopped items, and the cautious outlook on near-term growth due to consumer uncertainty and pressure on discretionary spending.
    • Profitability
      • Profitability is improving, as indicated by the increasing net income and net margin. This is driven by improved cost control and favorable product mix, as well as improved operational efficiency.
      • The company is facing some challenges in controlling operating expenses, which could impact future profitability.
    • Liquidity
      • The company's liquidity position appears strong, with increasing cash and short-term investments. However, the increasing short-term debt suggests a potential reliance on short-term financing, which could be a concern if the company faces unexpected challenges.
    • Solvency
      • The company's long-term solvency appears healthy, with decreasing long-term debt and increasing equity. However, the increasing short-term debt and decreasing working capital could indicate a potential strain on short-term liquidity.
    • Operational Efficiency
      • The company's operational efficiency appears to be improving, as evidenced by the increasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
      • The company's focus on operational efficiencies and inventory management is likely contributing to the improvement in gross margin and the decrease in inventories.
    • Cash Flow Analysis
      • Cash flows from core business operations are increasing, indicating strong profitability and efficient working capital management.
      • The company's free cash flow is expected to continue to grow, providing ample resources for future investments, dividend payments, and share repurchases.
      • The company's overall capital allocation strategy appears to be shifting towards a more conservative approach, with a focus on debt reduction and shareholder returns.
    • Risk Factors
      • The increasing short-term debt and decreasing working capital could indicate a potential strain on short-term liquidity.
      • The company's reliance on short-term financing could be a concern if the company faces unexpected challenges.
      • The company's cautious outlook on near-term growth due to consumer uncertainty and pressure on discretionary spending could impact future profitability.
      • The company's ability to control operating expenses is a key factor to monitor, as increasing expenses could impact future profitability.
    • Future Outlook
      • The company's future cash flows are expected to remain strong, with continued growth in operating cash flow and a focus on debt reduction.
      • The company's balance sheet is expected to continue to reflect a strong financial position, with increasing cash and short-term investments, decreasing long-term debt, and increasing equity.
      • Future revenue growth is expected to be modest, with a focus on maintaining profitability through cost control and operational efficiencies.
      • The company's price investment initiatives and continued investment in the Target Circle loyalty program and digital marketplace are expected to drive future growth.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-06)
Consumer Discretionary Select Sector SPDR Fund (XLY)
  • Performance Comparison:
    • TGT has shown a mixed performance history compared to XLY. While it has outperformed XLY in the short term (YTD, 1 Week, 1 Month, 3 Months, and 1 Year), it has underperformed in the longer term (6 Months, 2 Years, and 3 Years). This suggests that TGT's performance is more volatile and less consistent than XLY's.
  • Risk and Return Analysis:
    • TGT has provided higher annualized returns than XLY in the 1-year period but has underperformed in the 2-year and 3-year periods. This indicates that TGT's returns are not consistently higher than XLY's.
    • TGT has been more volatile than XLY, as evidenced by its higher annualized volatility. This suggests that TGT carries a higher risk profile than XLY.
    • TGT has experienced larger maximum drawdowns than XLY, indicating a higher risk profile. This suggests that investors in TGT could experience larger losses during market downturns.
  • Risk-Adjusted Performance:
    • XLY has consistently shown a higher Sharpe ratio than TGT, indicating that it offers better risk-adjusted returns. This means that XLY has been able to generate higher returns for the level of risk taken.
    • TGT's lower beta suggests that it is less sensitive to market movements than XLY. This indicates that TGT may be a less risky investment than XLY, particularly during periods of market volatility.
  • Overall Assessment:
    • TGT has shown a mixed performance history compared to XLY, with periods of outperformance and underperformance. While TGT has provided higher returns in the short term, its higher volatility and larger drawdowns suggest a higher risk profile. XLY, on the other hand, has consistently offered better risk-adjusted returns, as evidenced by its higher Sharpe ratio. TGT's lower beta suggests that it may be a less risky investment than XLY, but its inconsistent performance and higher volatility are concerns. Investors should carefully consider their risk tolerance and investment goals before making any investment decisions.
Peers Price History(as of 2024-09-06)
Walmart, Inc. (WMT)Costco Wholesale Corp. (COST)
  • Performance Comparison:
    • Target Corp. (TGT) has significantly underperformed its peers, Walmart, Inc. (WMT) and Costco Wholesale Corp. (COST), over the past three years. This underperformance is particularly evident in the longer time periods, with TGT lagging behind its peers by a substantial margin.
    • The stock's performance has been inconsistent relative to its peers, with periods of outperformance in shorter time frames like 1 week and 1 month, but consistently underperforming in longer time frames.
  • Risk and Return Analysis:
    • Target Corp. (TGT) has provided lower annualized returns than its peers over the past three years. This underperformance is consistent across all time periods, indicating a weaker overall return profile.
    • Target Corp. (TGT) has exhibited higher annualized volatility than its peers, suggesting that its price is more susceptible to fluctuations. This higher volatility is reflected in its larger drawdown figures.
    • Target Corp. (TGT) has experienced a maximum drawdown of 58.87%, significantly higher than its peers, Walmart, Inc. (WMT) at 10.81% and Costco Wholesale Corp. (COST) at 26.42%. This indicates a higher risk profile for TGT, as its price is more vulnerable to significant declines.
  • Risk-Adjusted Performance:
    • Target Corp. (TGT) has generally offered a lower risk-adjusted return than its peers, as indicated by its lower Sharpe ratio. This suggests that its returns have not been as strong relative to its risk compared to its peers.
    • Target Corp. (TGT) has a beta value greater than 1, indicating that it is more sensitive to market movements than its peers. This higher sensitivity to market changes further contributes to its higher risk profile.
  • Overall Assessment:
    • Target Corp. (TGT) has consistently underperformed its peers, Walmart, Inc. (WMT) and Costco Wholesale Corp. (COST), in terms of both absolute returns and risk-adjusted returns. The stock has exhibited higher volatility and larger drawdowns, indicating a higher risk profile.
    • While TGT has shown some periods of outperformance in shorter time frames, its overall performance has been inconsistent and its risk profile remains a concern. Investors should carefully consider these factors before making any investment decisions.
Peers Fundamentals(as of 2024-07-31)
Walmart, Inc. (WMT)Costco Wholesale Corp. (COST)
  1. Market Position and Size:
    • TGT is the smallest company in the peer group, with a market cap that is less than 1/5th the size of its largest peer, WMT. This suggests that TGT has a smaller market share and less brand recognition than its peers.
    • TGT's market cap is significantly smaller than its peers, but its revenue is also significantly smaller. TGT's revenue is 15.0% of WMT's and 43.4% of COST's. TGT's EBITDA is 21.6% of WMT's and 8.8% of COST's. TGT's net income is 26.5% of WMT's and 71.0% of COST's. This suggests that TGT is more profitable than WMT on a relative basis, but less profitable than COST.
  2. Profitability and Efficiency:
    • TGT's profitability metrics are generally higher than its peers, particularly its EBITDA Margin and Net Profit Margin. This suggests that TGT is more efficient at converting sales into profits than its peers.
    • TGT's profitability is strong considering its size and revenue. While its market cap is significantly smaller than its peers, its profitability metrics are generally higher. This suggests that TGT is able to generate strong profits despite its smaller size.
    • TGT is overperforming in profitability metrics compared to both peers and industry standards. Its EBITDA Margin and Net Profit Margin are significantly higher than both its peers and the industry average.
  3. Financial Health and Stability:
    • TGT's liquidity is relatively weak compared to its peers and the industry average. Its Current Ratio and Quick Ratio are both below the industry average, suggesting that TGT may have difficulty meeting its short-term obligations.
    • TGT's debt position is relatively high compared to its peers and the industry average. Its Total Debt to Total Equity Ratio is significantly higher than its peers and the industry average, suggesting that TGT has a high level of financial leverage. However, its Debt / EBITDA is significantly lower than the industry average, suggesting that TGT is able to manage its debt load effectively.
    • TGT's overall financial health is relatively strong, despite its lower growth rates and high debt levels. TGT's profitability and efficiency are strong, and its cash flow generation is robust. However, TGT's liquidity is relatively weak, and its debt levels are high. This suggests that TGT may be at risk of financial distress if its earnings decline.
  4. Valuation and Market Perception:
    • TGT's valuation metrics are generally lower than its peers and the industry average. This suggests that the market is valuing TGT at a discount to its peers and the industry. This could be due to TGT's smaller size, lower growth rates, or concerns about its debt levels.
    • TGT's market cap is significantly smaller than its peers, but its earnings are relatively high. This suggests that the market is valuing TGT at a discount to its peers, despite its strong earnings. This could be due to TGT's lower growth rates, concerns about its debt levels, or other factors.
  5. Cash Flow and Capital Management:
    • TGT's cash flow generation strength is relatively weak compared to its peers, considering their market caps. Its Net Operating Cash Flow, Total Capital Expenditure, and Free Cash Flow are all significantly lower than its peers. This suggests that TGT may have difficulty generating enough cash flow to support its growth and debt obligations.
    • TGT's Free Cash Flow and Free Cash Flow Margin have been growing at a faster rate than the peer group average. This suggests that TGT is able to generate strong cash flow despite its lower growth rates in other areas.
  6. Growth and Future Prospects:
    • TGT's growth rates are generally lower than the peer group average. This suggests that TGT may be facing challenges in growing its sales and profits.
    • TGT's year-over-year growth rates have been volatile, particularly for EBITDA, Net Income, Basic Earnings per Share, and Free Cash Flow. This suggests that TGT's growth is not consistent and may be subject to external factors.
    • TGT's 5-year CAGRs are generally lower than its 3-year CAGRs for most metrics, suggesting that TGT's growth has been decelerating over the past 5 years. This is particularly true for Sales/Revenue, in millions, EBITDA, Net Income, Basic Earnings per Share, Free Cash Flow, Free Cash Flow Margin, Total Assets, Book Value Per Share, and EBIT Margin.
    • TGT's growth is concentrated in Free Cash Flow and Free Cash Flow Margin, where its 5-year CAGRs are significantly higher than the peer group average. This suggests that TGT is able to generate strong cash flow despite its lower growth rates in other areas.
    • TGT's growth profile is not balanced across different metrics. Its growth is concentrated in Free Cash Flow and Free Cash Flow Margin, while its growth in other areas is lower than the peer group average. This suggests that TGT may be facing challenges in growing its sales and profits, but is able to generate strong cash flow.
  7. Potential for Investment:
    • TGT's investment attractiveness is mixed. TGT's profitability and efficiency are strong, and its cash flow generation is robust. However, TGT's growth rates are lower than its peers, and its debt levels are high. This suggests that TGT may be a good value investment, but its growth potential is limited.
  8. Key Risks and Considerations:
    • TGT's lower growth rates could limit its ability to generate shareholder value in the long term.
    • TGT's high debt levels could make it vulnerable to financial distress if its earnings decline.
    • TGT's weak liquidity could make it difficult for the company to meet its short-term obligations.
  9. Overall Assessment:
    • TGT is a profitable and efficient company with strong cash flow generation. However, its growth rates are lower than its peers, and its debt levels are high. This suggests that TGT may be a good value investment, but its growth potential is limited. Investors should carefully consider the risks associated with TGT's high debt levels and weak liquidity before making an investment decision.