What Wall Street Is Doing With Target's Stock

by Jayson Derrick

August 20, 2015 1:17 PM | 4 min read | Make a Comment

Shares of

Target Corporation

TGT

traded as high as $84.62 after the company reported its

second quarter results on Wednesday. By Thursday morning, the stock completely reversed course and dipped below the $80 per share mark as investors and traders were debating the positives and negatives contained in the print. Here is a roundup of what Wall Street's top analysts are saying following the print. Deutsche Bank: Initiatives ‘Gaining Traffic' Paul Trussell of Deutsche Bank commented in a note that Target's "solid" second quarter print included accomplishments such as a 20 basis point beat on comp. In addition, comp sales in signature categories (style, baby, kids, wellness) grew three times faster than the company average. Trussell further noted that Target's success in the second quarter demonstrates that the company's CEO Brian Cornell's strategic initiatives are "gaining traction." However, Target faces increasingly tougher comparisons in the back half of the year, although the company's momentum is expected to carry forward into back-to-school and the Holiday season through continued merchandising improvements and expense discipline. Finally, Trussell stated that Target's stock already reflect the benefits of healthier traffic trends, a more favorable macro-economic and expense leverage. Shares remain Hold rated with a price target raised to $84 from a previous $82. Morgan Stanley: Tough Quarters Ahead Simeon Gutman of Morgan Stanley commented in a note that Target's second quarter was "better than expected" due to "much lower" expenses. Gutman continued that the true test to the Target story (and the stock's performance) rests on its fourth quarter. The analyst added that he sensed a "slightly more tentative tone" from management during the post-earnings conference call with respect to: 1) its own tougher comparisons, 2) prior progress made in last year's fourth quarter, 3) competition being "more aggressive" on inventory, and 4) a need to improve its in-stock positioning. Gutman also pointed out that Target's own full-year guidance implies a fourth quarter earnings per share of $1.39 to $1.64 ($1.51 at midpoint) which is a few pennies short of the consensus estimate. Gutman finally stated Target appears to be "making headway" on its $500 million of cost savings this year with another $1.5 billion slated for the next two years. However, omni-channel investments may come in higher than expected over time (like it has for other retailers). In addition, there exists risks to the company's long-term 10 percent earnings growth guidance. Bottom line, the stock is "trading on optimism" rather than "sustained margin improvement." Shares remain Underweight rated with an unchanged $74 price target. UBS: Will Supply Chain Changes Be Enough? Michael Lasser of UBS commented in a note that shares of Target lost momentum during Tuesday's trading session after "it became clear" that $0.05 of the earnings per share beat was due to a shift in marketing expenses. In addition, investors were also hoping for a brighter third quarter comp outlook – which the analyst suggested is "conservative." Lasser did note that excluding the 30 basis point benefit from shifting marketing expenses into the third quarter, the company still grew its operating margins by over 60 basis points for the third consecutive quarter. The analyst added that while the gross margin will likely taper in the bottom half of 2015, he is still modelling an impressive 35 basis points expansion (versus management's expectations for only a "modest" expansion) for the full fiscal year. However, Lasser pointed out that while Target has increased its omnichannel offerings, its fulfillment structure has "lagged" which resulted in more out of stocks. The analyst suggested that while a greater focus on supply chain is "prudent," it may not be fixed by simply re-purposing employee hours. Shares remain Neutral rated with a price target raised to $84 from a previous $82. MKM Partners: Digital Top Priority Patrick McKeever of MKM Partners commented in a note that he is "generally positive" on Target's management team and its recent strategic moves. Specifically, digital channel investments is a top strategic priority as the company is appropriately directing more than $1 billion towards digital channel improvements. The analyst added that the company is now shipping digital orders from approximately 140 stores (with plans to expand to more than 450 stores by the end of the year) and will also begin testing a guaranteed delivery time. If successfully implemented, the company could see higher conversion rates. McKeever also noted that Target faces tougher comparisons and will be up against a 3.8 percent comp increase and strong earnings per share growth in the fourth quarter. However, the analyst stated that the third quarter comps are tracking below the second quarter's 2.4 percent rate and should decelerate to about one percent in the fourth quarter. Bottom line, McKeever suggested that the risk to reward profile is "relatively well balanced" heading into a difficult back half of 2015. Shares remain Neutral rated with a "fair value" price target raised to $82 from a previous $81.

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Posted In: Analyst Color Analyst Ratings Deutsche Bank Michael Lasser MKM Partners Morgan Stanley Patrick McKeever Paul Trussell retailers Simeon Gutman Target UBS

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