Target Corp. faced adversity in 2022 as the shift in consumer behavior resulted in excess inventory and a drop in operating margin to 3.5% by year-end. Although 2023 is expected to be a recovery year with minimal same-store sales growth and modest improvements in gross and operating margin, Target’s expectations have been lowered with a long-term goal of achieving a 6% operating margin. The company’s 2024 earnings per share (EPS) are expected to be $11.41. Longer-term projections suggest 7%-8% EPS growth, but the current trailing price-to-earnings ratio implies a return of just 5% over the next 21.5 months, below the market average. However, as a long-term owner, one can continue to hold Target, but potential investors may want to wait for a sale or consider other alternatives.
Important Details about Target Stock: Aiming Lower (NYSE:TGT) –
– Target had two strong years of growth during the Covid-influenced period of 2020-2021
– Revenue growth was a key driver, with sales increasing $27.5 billion in 2 years (36%)
– Target adapted quickly to the change in shopper behavior during the pandemic
– Inventory shrink increased over $500 million in 2022, resulting in excess inventory and lower operating margins
– Same store sales are expected to be about flat in 2023 with a small improvement in gross margin
– Target now only expects to get back to 6% operating margin, or just in line with where it was prior to the pandemic
– Valuation shows a 5% return over the next 21.5 months
– Target had negative free cash flow of -$1.5 billion in 2022 but is expected to improve in 2023
– Target paid $3.96 in dividends in 2022 and will likely have a smaller dividend increase in 2023
– Target will need to issue another $1.6 billion of debt next year which is a 10% increase from the $16 billion of long-term debt outstanding at the end of 2022
– Target will deliver operating margins and growth similar to what they did before 2020, but with this higher sales base in the future.
Vertigo3d: More Help from the Market Than Previously Believed
Target Corp. (NYSE:TGT) had a strong two-year growth period during the covid-influenced period of 2020-2021. The company’s share price doubled during this time frame without relying on multiple expansion, as earnings per share also doubled during this period. Revenue growth was a key driver, with sales increasing $27.5 billion in two years after increasing only $5.9 billion in the six years prior. Target adapted quickly to the change in shopper behavior during the pandemic, using its stores to fulfill online orders and expand drive-up and delivery options. However, despite the company’s strong performance, management faced headwinds such as employee wage and benefits increases, growing theft, and increased inventory shrink, affecting the operating margin. As a result, Target’s stock price dropped to the $160 level in 2022, where it has remained flat.
Lowering Future Expectations
Looking forward, Target is expected to have a recovery year in 2023. Same-store sales are expected to be about flat. There should be a small improvement in gross margin due to right-sizing inventories, and operating margin should improve from lower freight and transportation costs as supply chain issues and energy inflation subside. However, this will only result in a $1 billion increase in operating profit for 2023, yielding an operating margin of 4.4%, which is below historical averages. Longer term, Target now only expects to get back to the 6% operating margin it had prior to the pandemic.
Valuation and Capital Management
Tracking the company’s growth and performance, Target’s stock had an average P/E of around 15 prior to 2020, when the company had similar margins and growth rates as those expected in the future. At $163, Target is currently valued at 14.3 times 2024 earnings. Therefore, analysts predict that the company’s price target by 2024 will hover around $171.15, signifying a mere 5% return over the next 21.5 months or 2.8% annualized. A 2.7% annualized dividend yield is expected, equating to an expected return of 5.5%, below the market average.
Target had $4 billion in operating cash flow in 2022, less than half of the 2021 result. Working capital consumed $2.4 billion of cash in 2022 compared to $1.4 billion. The company built inventories in 2021 and paid off payables in 2022. Capex in 2022 was $5.5 billion, meaning Target had negative free cash flow of -$1.5 billion. Although improvements are expected by 2023 after Target has right-sized its inventories, the company will need to issue another $1.6 billion of debt next year, which is a 10% increase from the $16 billion of long-term debt outstanding at the end of 2022.
No Clear Winning Alternatives
Target had a rough 2022 due to shifting consumer spending patterns. However, the company still grew sales and market share. While Target’s operating margins and growth will resemble the pre-2020 period, the company now has a higher sales base. Although 2023 will be a recovery year, Target is expected to be back on track in 2024. As a long-term owner, holding onto Target is still a good idea due to tax impacts of selling and lack of clear winning alternatives in the sector. For new shareholders, waiting for a sale or looking elsewhere may be a better idea.