Target Quarterly Results Outpace Expectations, but Outlook Disappoints.

Target Stock at a Glance

• Current Morningstar Fair Value Estimate: $177
• Target Stock Star Rating: 3 stars
• Economic Moat Rating: None
• Moat Trend Rating: Negative

Target Earnings Update

We don’t expect a material change to our $177 fair value estimate after unpacking no-moat Target’s TGT fourth-quarter results. Its full-year top- and bottom-line results of $109 billion and $5.98, respectively, outpaced our $108.4 billion and $5.43 estimates, but the 2023 outlook (comparable sales growth ranging from a low-single-digit decline to a low-single-digit increase and $7.75-$8.75 in diluted EPS) was disappointing. Shares edged up about 3% on the print, and while still offering a modest discount, we think investors should await a larger margin of safety.

In the quarter, cost deleveraging and a mix shift to essential items (40% of sales by our estimate, at the expense of discretionary categories that generally carry higher margins) posed less of a threat to Target’s profitability than we had anticipated.

Target Shows Progress in Pruning Inventories

While we see softening demand for discretionary items and elevated promotional intensity persisting throughout fiscal 2023, we are encouraged to see Target’s progress in pruning its inventories (with total and discretionary inventory levels down 3% and 13%, respectively), aided by aggressive markdowns to protect the customer experience and store efficiency, which we view as prudent.

Target’s Plan for Drive-Up Returns a Plus

We hold a favorable view on Target’s plans to implement drive-up returns (in addition to order pickup) across its chain by the end of the summer. In our opinion, roll out of this offering should simultaneously deliver convenience to its customers through an expanded omnichannel capability (on top of digital sales penetration that stood at 19%, consistent with the year prior) and cut its mail-in return expenses. And while we applaud such an addition to the business, we maintain our view that the lack of switching costs and intense competition in retail and Target’s harder-to-differentiate assortment prevent it from garnering a moat. Our long-term forecasts of low-single-digit yearly revenue growth and high-single-digit operating margins remain intact.