Morningstar | Digital Results Highlight a Strong Quarter for Target; Shares Trade Fairly
We plan to lift our $73 per share valuation for no-moat Target by a mid- to high-single-digit percentage after it reported first-quarter earnings that outpaced our marks. While we expect to raise our near-term outlook to reflect the brisk start to fiscal 2019, our long-term take still calls for low-single-digit top-line growth against mid-single-digit adjusted operating margins over the next 10 years. With shares up nearly 10% after the announcement, we suggest investors await a more attractive entry point.Target’s 4.8% first-quarter comparable sales growth beat our 4.0% target and was driven by traffic (up 4.3%). Results were spurred by 42% comparable digital sales growth. Management reiterated its full-year guidance, calling for adjusted EPS of $5.75 to $6.05. Before the announcement, we had called for $5.91; we suspect management’s range is somewhat conservative given the strong start to the year and as scheduled tariffs are already incorporated.
The digital results are consistent with our belief that management’s efforts to make its stores omnichannel fulfillment centers are well founded. Particularly encouraging, more than half of growth came from Target’s same-day fulfillment offerings (drive-up, in-store pickup, and same-day delivery), which are more lucrative for the company than the ship-to-home channel. We believe the stores’ proximity to customers should allow Target to minimize delivery costs and encourage shoppers to pick up items themselves.
Management has done well to balance digital growth with continued in-store execution, with first-quarter store comparable sales up 2.7%. We believe this reflects the success of the remodeling efforts, a refreshed private label assortment, and a strong retail environment. However, we continue to believe that Target’s longer-term prospects are challenged by intensifying competition against larger or more differentiated rivals that will largely dictate the terms of engagement, leading to our no-moat rating.
Target provides its customers everyday essentials and merchandise. The company sells an assortment of general merchandise and food. The majority of the company's general merchandise stores provide an edited food assortment, including perishables, dry grocery, dairy, and frozen items. The company's small format stores provide curated general merchandise and food assortments. The company's digital channels include merchandise assortment, including various items found in its stores, along with a complementary assortment. The company also sells merchandise through periodic design and partnerships. The company's owned brands merchandise include: A New Day?, Archer Farms?, Art Class?, Ava & Viv?, Cat & Jack?, and Cloud Island?, among others.
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