Target Corporation (TGT): Bruised retailer fights for survival

Target (NYSE:TGT), once a beloved retailer, is going through one of its biggest crisis in its 61-year history. Its revenue growth has slowed while its stock has plunged to the lowest level since 2020.

Unlike other popular retailers like Costco and Walmart, Target’s stock has crashed by over 58% from its all-time high. This plunge has brought its total market cap to over $50.34 billion.

Culture war challenges

Target’s stock price crash is a combination of various factors. For one, while Target is a beloved discount retailers, the current wave of inflation has pushed people to the likes of Walmart and dollar stores like Dollar General and Family Dollar.

A key challenge for the company is that, like AB InBev, it has become a major part of the ongoing culture war in the United States. The most recent crisis happened a few months ago, when the company listed LGBTQ products that irked conservatives.

Many conservatives criticised the beloved store for going woke while liberals blasted the company’s response to the crisis. While most boycotts don’t work, there are signs that Target’s business was impacted. In his statement, the firm’s CEO said:

“And as we talk to these guests, they consistently tell us that Target is their happy place, somewhere they can go to escape and recharge. So as we navigate an ever-changing operating and social environment, we’re committed to staying close to our guests and their expectations of Target.”

The Pride Month crisis had an impact on the company’s business. Its sales dropped by 4.9% while its comparable same store sales plunged by 5.4%. Its total revenue of over $24.5 billion was lower than analysts’ forecasts by over $400 million. Worse, Target decided to slash its guidance for the year.

In contrast, Walmart’s revenue rose by 7.31% in Q2 while Dollar General, Dollar Tree, and Costco rose by over 6%. Target’s profitability has also lagged other retailers. Its forward EV to EBITDA stood at minus 10.39% while Walmart has 3.75% and Costco has 8.53%.

Target is not the only big company that has become a lightning rod in the cultural war issues. AB InBev has lost market share in the United States while its sales have dropped after it partnered with Dylan Mulvaney.

Retail theft is a major challenge

Target Corporation has also become a major victim of the ongoing retail theft in major cities. Retail theft has increased in the past few years after prosecutors in key cities like San Francisco stopped focusing on it.

As a result, the company has seen organised theft jump by 120% this year. In all, according to the National Retail Federation, retail theft soared by 20% leading to over $112 billion in losses.

Target has responded to this by shutting down stores and boosting its store security, a highly expensive process.

Target’s performance has other causes as well. A big concern was its high inventory levels after the Covid-19 pandemic. The company was forced to offer most of these products at a discount, which led to lower profits.

The most recent results showed that Target’s EBITDA and net income margin dropped to 6.98% and 3.12%, respectively. While these margins are higher than Walmart’s, they are much lower than what it made in the past.

Target stock price is cheap for a reason

All these headwinds have made Target one of the cheapest retail stocks in the US. It has a forward PE multiple of 14.3, much lower than Walmart’s 24 and Costco’s 34.

Target has an EV to EBITDA of 9 compared to Walmart’s 13. Other metrics, including a comprehensive discount cash flow (DCF) model shows that the company is clearly undervalued. As shown, Target has underperformed its key retail peers substantially in the past few years.

Target vs Walmart vs Costco

Therefore, most analysts believe that the Target stock price will ultimately bounce back. According to WeBull, there are 35 analysts who cover the company. Of these, 56% have a hold rating while 25% and 19% have a buy and strong buy rating. The average target for the stock is $149, higher than the current $108.

Target’s recovery will only happen when the company manages to address its inventory levels and boost its revenue and profitability growth.

Target’s history might help

A key silver lining for Target is that it has a storeyed history. The company was started in 1962 as part of a bigger retail company known as Dayton’s. It was later on spun off into a separate entity in the 1970s.

As part of its growth back then, the company acquired several other retailers, including Mershall Fields, Hudson, and Mervins. It then sold these companies for over $4 billion in the early 2000s as the management focused on its brand.

Most recently, Target has invested in its e-commerce operations and modernising its stores, which are available at least 10 miles of all Americans. Unlike Walmart, which spent heavily in tech acquisitions, Target built its e-commerce operations internally.

Target will likely use the past challenges, including its woke policies, to position itself for the future. It will also benefit as inflation drops and as it handles its inventory challenges.

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