Fiery Flash: Target - not all retailers are created equally

Shares of U.S. retailer Target plunged 22% last Wednesday after the company published its third-quarter results. Since the start of the year, the stock has declined 15%. From its peak in 2021, the stock has lost over half of its value.

Target is an American retailer that opened its first store in 1962. Today, the company operates a chain of over 1,950 discount department stores and hypermarkets, varying in size from several thousand square feet to over 200,000 square feet. Over 75% of the U.S. population lives within 10 miles of a Target store. Last year, Target generated USD 107 billion in sales. The company employs approximately 415,000 people. Target donates 5% of its profits to communities.

The drop in Target’s share price last Wednesday was due to sales and earnings that were 20% below the analyst consensus. Comparable sales growth is a key driver for a retailer. This metric was down (-3.7% in 2023, +2.2% in 2022). Year-on-year, the operating profit margin dropped by 60 basis points (bps) to 4.6%. In addition, Target expects stagnant sales (flat comparable sales growth) and EPS of USD 1.85 to USD 2.45 (down 28% y-o-y at the midpoint of this range) for the final quarter of the year.

Sure, sluggish demand for certain discretionary products, warm weather, and port disruptions (as strikes led to inventory build-up and delayed shipments) were not helpful in the quarter as these weighed on sales and led to higher costs. But there are also company-specific issues. Execution is weaker than at key competitor Walmart. While Target suffers, Walmart (and Amazon) thrive. While Target reported negative comparable sales growth and an earnings decline in the third quarter, Walmart reported very sound results , including 5.5% comparable sales growth excluding fuel and an 8.2% increase in operating income.

Graph: stock price evolution of Target versus Walmart - Source: Econopolis, LSEG Datastream

Year-to-date, shares of Target have declined approximately 15%. This contrasts with the broader stock market, as measured by the S&P 500, which has risen about 25%, and shares of peer Walmart, which have increased by 66%. Currently, Target’s shares are trading at approximately 14 times earnings, with an enterprise value-to-EBITDA ratio of around 10, and offer a dividend yield of about 3.4%. While these valuation metrics may not appear particularly high, achieving a higher share price would likely require a return to profitable growth.