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May 20, 2022, 3:39 p.m. EDT

Target stock downgraded as multiple analyst groups blame execution for profit hit

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By Tonya Garcia

Analysts say one factor driving Target Corp.’s wide first-quarter profit miss was the company’s execution missteps.

“In our view, the company failed to execute properly in what is becoming a highly challenging environment, which has created substantial uncertainty on the outlook for Target,” wrote Truist Securities, which took the rare step of downgrading Target stock intraday on Wednesday.

Target said on Wednesday during its quarterly earnings review that it had too many “bulky” items, leading to markdowns.

See: Target stock plunges as profit drops on consumer spending shifts and jump in freight costs

“We suspect that due to extended lead times on product ordering and aggressive moves to build in-stock positions, that companies (including Target) are now trying to forecast demand much further into the future than what they have historically done,” analysts led by Scot Ciccarelli wrote.

“Then, when demand doesn’t materialize, they have much more markdown risk than what we have seen in the past. Nevertheless, as one of the biggest retailers/importers in the US, we would have expected far better execution than what the company just posted, especially as it continues to work through inventory.”

Truist downgraded Target to hold from buy and slashed its price target to $171 from $261.

Target was also downgraded to hold from buy at CFRA on Wednesday. The retailer’s price target was slashed to $165 from $288. 

And the retailer was downgraded to hold from buy at Stifel, with analysts there cutting their price target to $185 from $270.

“Cost pressures are greater-than-expected and we think are likely to continue through at least yearend 2022, resulting in considerable earnings pressure,” analysts led by Mark Astrachan wrote.

“Gross margin weakness is most pronounced and reflects lower discretionary spending resulting in higher markdown rates and impairments on significantly heightened inventory levels.”

In addition to the inventory problems, Target also said it’s facing much higher freight costs than first expected, with the total now expected to reach $1 billion for the year.

Also: Walmart says consumers are trading down to private label for items like dairy and bacon

“Given the duration of expected inventory and freight pain, we consider Target’s profitability issues to be a difficult macro situation compounded by execution issues,” wrote Bill Kirk at MKM Partners.

“Comparatively, we believe Walmart’s profitability issues are predominantly caused by the macro environment, with much less of an execution misstep.”

Among the hurdles Walmart /zigman2/quotes/207374728/composite WMT +0.86% called out during its first-quarter earnings report were merchandise delays, the shift in consumer spending, and a fire at one of its largest fulfillment centers.

Consumers are both trading down and moving their spending to experiences like travel and away from goods.

“Target now has more market share worth defending, but we anticipate a more aggressive competitor response in 2022, particularly as discretionary categories slow,” MKM said.

MKM rates Target stock neutral with a fair value estimate of $180, down from $253.

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BMO Capital Markets says Target is willing to spend to protect that acquired market share, including on higher freight expenses.

“Despite a still solid top-line outlook, clearly Target is more focused on maintaining and growing customer traffic(healthy +3.9%, +21% on a 2-year), and willing to absorb significantly higher costs (freight expected to be up +$1 billion above plan), which management clearly feels will pay off over time as it works to maintain meaningful market share gains from the past few years,” wrote analysts led by Kelly Bania.

“Target likened this margin investment similar to the company’s billion-dollar 2017investment, which ultimately did pay off, but could take time.”

BMO rates Target stock outperform with a $210 price target, down from $250.

Target’s price target was also cut at Cowen (down to $190 from $265, stock rated outperform); Raymond James (target price lowered to $205 from $275, stock rated strong buy); and JPMorgan (down to $188 from $302, stock rated overweight).

Target shares closed Thursday down 5.1% after ending Wednesday with the biggest one-day selloff since Black Monday, down 25%. The stock has slumped 33% for the year to date.

/zigman2/quotes/207374728/composite
US : U.S.: NYSE
$ 123.69
+1.06 +0.86%
Volume: 2.11M
July 5, 2022 12:29p
P/E Ratio
26.50
Dividend Yield
1.82%
Market Cap
$336.15 billion
Rev. per Employee
$250,440
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