Analysts Like Target's Strong Comps, Interested In Move To Omnichannel Business

Target Corporation TGT's strong sales numbers have the sell-side bullish, with particular interest in the legacy retailer’s addition of digital order fulfillment to its apparent strengths.

Target beat analysts' estimates on both earnings and sales in its first quarter report on Wednesday. Target saw share gains and strong comps across all five of its major merchandise categories in the quarter. And with competitors shrinking their physical presence, Target is winning.

“We continue to believe that Target will see comp benefits from share gains in high-margin categories (home/apparel) as more retailers reduce store footprints,” KeyBanc’s Edward Yruma wrote in a note.

Omnichannel Business

Even as it survives the move to online shopping, several analysts were particularly impressed with Target’s strong move into fulfillment of digital orders, lending credence to the notion Target can be profitable in an omnichannel business.

Same-day fulfillment services drove over half of digital sales growth – great for Target because of the lower costs.

“Since same-day digital services are Target’s most profitable services, their fast growth is contributing to strong gains in digital profitability,” Yruma noted.

Target says it's on track to generate more than $1 billion in incremental online sales over the course of the year but UBS analyst Michael Lasser said given Target’s heavy investment in the channel, that projection could be conservative.

That digital investment, though, is also part of the long-term risk discussion, said Credit Suisse analyst Seth Sigman.

“The number one long-term concern we hear on TGT is the risk that more spending on technology and fulfillment will be needed over time,” Sigman wrote. “We will be monitoring the recent success of the company's store-centric and same day delivery options, which have the potential to change that narrative.”

Valuation

Target also benefits from a lower share price.

JPMorgan’s Christopher Horvers said not only did Target have strong comps, but it's now undervalued, calling the stock the “Rodney Dangerfield of large cap retail.”

In the long term, Bank of America Merrill Lynch analyst Robert Ohmes said Target will benefit from a “discount store decade,” because of demographics, a strong outlook for new home sales, the closing of certain competitors, and opportunities that come from digital innovation.

Staying Power Question

But the long-term also brings questions. Lasser acknowledged another solid quarter, but remained neutral on concerns about staying-power.

“The question from here is if TGT can sustain its trends as it confronts tougher compares in the coming quarters,” Lasser wrote.

• KeyBanc has an Overweight rating and a $110 price target on Target.
• JPMorgan upgraded Target from Neutral to Overweight, while raising the price target from $81 to $100.
• UBS remained Neutral on the stock but raised the price target from $77 to $82.
• Bank of America reiterated a Buy rating, raising the price objective from $100 to $105.
• Credit Suisse maintained an Outperform rating while raising the target price from $85 to $90.

Target was trading up by 1.8 percent on Thursday to $79 per share.

Related Links:

JPMorgan Takes Bullish Turn On Target, Says Retailer Underappreciated By Investors

Morgan Stanley Upgrades Target After Recent Pullback

Photo courtesy of Target.