Target: Encouraging Results, but We're Still Skeptical

After its strong second-quarter earnings, we plan a mid- to high-single-digit percentage uptick to our $65 fair value estimate for no-moat

Target posted 7% quarterly sales growth on stellar 6.5% comparable sales expansion, its best mark in 13 years. Management lifted its fiscal adjusted EPS 2018 guidance to $5.30 to $5.50 from $5.15 to $5.45, above our $5.29 mark.

We were encouraged by the quality of the results, with stores posting 4.9% quarterly comparable sales growth and comparable digital sales up 41%. Year-to-date expansion was not solely driven by promotions, with sales at Target's everyday prices up more than $2 billion (roughly 3% of fiscal 2017 revenue) in fiscal 2018. As a result, we believe the performance to date suggests that Target's investments in store modernization and a broader array of fulfillment options (ship-to-home, click-and-collect, delivery of purchases made in store) are bearing fruit.

Despite the progress, we are skeptical of Target's ability to ward off competitive pressure relative to wide-moat retailers like Walmart or Costco. Without the former's procurement leverage or the latter's differentiated business model (permitting a limited assortment, no-frills stores, and a membership structure with high renewal rates built on low prices), we argue Target does not enjoy the degree of cost advantage that the other titans enjoy. So, we believe it has less of an ability to compete on price against brick-and-mortar rivals and Amazon and is more exposed to store experience-based competition from other peers.

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