Morgan Stanley Cuts Target's PT To $67 As Retail Claims Another Victim

Target Corporation TGT reported better-than-expected 1Q EPS, but reduced its guidance for 2Q. Morgan Stanley’s Simeon Gutman maintained an Underweight rating for the company, while slashing the price target from $72 to $67. The analyst commented that the Q1 slowdown and Q2 guidance indicates that Target fell prey to the consumer/retail weakness.

Although Target’s 2016 outlook appears achievable, it is backend loaded and calls for a comp acceleration in 2H, analyst Simeon Gutman noted.

Performance in 1Q

The company reported its 1Q EPS at $1.29, marginally ahead of consensus. Comps of 1.2 percent were in-line, since expectations had been lowered due to softness in the retail space and after several department stores reported disappointing results last week.

Target generated EBITDA margin expansion ex-Pharmacy to 11.5 percent. Gutman termed the performance as solid, since it was achieved despite decelerating comps in April.

2Q Guidance

The company projected comps of -2 percent to flat for 2Q, significantly short of the consensus expectation of 1.8 percent. “This guidance suggests that TGT exited Q1 with negative comps, likely around 2%,” the analyst wrote.

Target guided to a ~80 bps gross margin contraction in 2Q, which leaves ample room for the company to increase its promotions to clear excess inventory, particularly in apparel.

Gutman commented that the revenue slowdown is mostly related to the macro and weather conditions, and less so due to a channel or share shift.

Long Term

“Recent cost reductions will be cycled next year and thus, it seems a 3% comp is needed to offset higher investments in order to maintain the 10.5% EBITDA margin goal. Without a 3% comp, EBITDA margins could begin to contract taking down TGT's EBITDA multiple along the way,” the analyst noted. He added that the long-term comp goal of 3 percent “seems increasingly elusive.”