EUR 850.00 For Business Accounts Only

Morningstar | While Target Has Boosted Its Digital Presence, Competition Remains Intense

We are lifting our fair value estimate of no-moat Target to $73 per share from $68, reflecting solid year-end sales and the time value of money. Although we have a favorable view of management’s efforts to boost its e-commerce offerings (through its ongoing store renovation program and 2017 purchase of Shipt), the relentless competitive environment should continue to exert pressure on the firm’s top-line growth and profitability prospects. We expect low-single-digit top-line growth against 5.6% adjusted operating margins, on average, over the next decade. With the shares trading near their valuation, we suggest investors await a more attractive entry point before building a position.

Although the firm’s brand is iconic and recent return performance has been solid (averaging 15% over the last three years), we believe competitive pricing and fulfillment costs will make it difficult for Target to replicate its margin performance from fiscal 2010-15, when it posted a 7.2% average. While management has done well to maximize the value of its store base through a multibillion-dollar effort to turn its locations into omnichannel fulfillment centers (capitalizing on Target’s proximity to customers), we believe customers’ rising expectations and the unparalleled scale benefits that Amazon and Walmart enjoy will necessitate continued investment.

While we believe its days of significant growth through footprint expansion are largely behind it, we have a favorable view of Target’s efforts to open small-format stores in areas that cannot support a larger location (such as urban areas and college campuses). We believe the more focused operations provide Target access to a different customer set while improving its proximity to buyers. With management unlikely to pursue international expansion for years to come, we believe the units can tap new areas effectively, although competition in those markets is also intense.

The competitive environment leads us to believe that Target’s competitive standing is deteriorating, resulting in our negative moat trend rating. While its e-commerce investments and use of stores as omnichannel fulfillment centers should leave it considerably better positioned for the future of retail, it remains considerably smaller than the dominant physical retailer (Walmart) and the pacesetter in e-commerce (Amazon). Although its plans to implement a new loyalty program (currently in pilot phase) and strengthen its private brand portfolio should help preserve traffic growth, we expect relentless price pressure to hold margins and returns in check.