Morningstar | Target's Strong Quarter Underpinned by Balanced, Profitable Growth; However, Shares Appear Rich
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. Its quarterly results are consistent with strong performance across retail, so we expect to lift our short-term outlook. Still, we are wary of the long-term competitive dynamic Target faces, given its lack of differentiation in a sector with virtually no switching costs. As a result, our long-term forecast (low-single-digit top-line growth, mid-single-digit adjusted operating margins on average over the next decade) is intact.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.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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