Target's Challenges 'Look Structural'; Goldman Downgrades To Sell

Target Corporation TGT's pre-announcement of lower 4Q earnings highlights the company’s long-run challenge, Credit Suisse’s Matthew J. Fassler said in a report. He downgraded the rating on the company from Neutral to Sell, while reducing the price target from $77 to $67.

Structural Challenges

The growth of e-commerce has caused disruptions across the retail industry, not only in terms of market share losses to online sales, but the increased costs of managing an omnichannel presence. Redundant distribution and higher price transparency have added to the challenges.

Margins have been contracting due to online investments and “deleverage from eroding store productivity,” analyst Fassler commented. The combination of market share and margin contractions have resulted in the long-run decline of the department store format.

Although Target has performed better than most of its peers, it could be faced with stagnating sales and profits, as Amazon.com, Inc. AMZN “captures more apparel sales, catering to a TGT customer; as AMZN unveils rapid delivery in major metro markets; as peers sacrifice margin for online investment; and, as TGT moves further from its initial cost cutting effort,” Fassler wrote.

The EPS estimates for 2016 has been reduced by $0.11 to $5.10 to reflect the Q4 pre-announcement. Although the 2017 estimate remains unchanged, the estimate for 2018 has been reduced by $0.15 to $5.20.