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.
Walmart is engaged in global operations of retail, wholesale and other units, as well as eCommerce, located throughout the U.S., Africa, Argentina, Canada, Central America, Chile, China, India, Japan, Mexico and the U.K. The company's operations are conducted in three reportable segments: Walmart U.S., which is a mass merchandiser of consumer products, operating under the Walmart and Walmart Neighborhood Market brands, as well as walmart.com, jet.com and other eCommerce brands; Walmart International, which includes various formats divided into retail, wholesale and other categories; and Sam's Club, which is a membership-only warehouse club that also operates samsclub.com.
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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