By Teresa Rivas
After a difficult 2023, Target stock rose 1.4% on Thursday as investors welcomed a vote of confidence from Goldman Sachs. If the bank’s estimates are right, the shares could jump another 25%.
Analyst Kate McShane added Target to Goldman Sachs’ Conviction List, with a Buy rating and a $176 target for the share price. Even with the stock’s morning pop, to $141, that level — considerably higher than the average analyst price target of $153 — implies Target can increase its value by about a quarter over the next 12 months.
That would be a welcome change from 2023, when the stock lost more than 6% as the S&P 500 soared 24%.
Once a pandemic darling, Target has been hit with various obstacles that have hurt the shares. Inflation crimped consumers’ budgets for the discretionary items that make up the bulk of Target’s business, it has been swept up in the culture wars, and it was the poster child for retailers battling increased shoplifting. Margins have shrunk and traffic has waned, spooking investors.
On Monday, Target logged its worst percentage decrease since September. But McShane believes that the worst of the pain is over, saying the stock’s decline creates an opportunity to buy. According to FactSet, the shares change hands at just over 15 times forward earnings, well below their five year average of 17.1 times.
According to McShane, Target is likely to face easy comparisons in the year ahead, “with a boost from a return to discretionary spending from a buoyant U.S. consumer in a soft landing economy, margins eventually recovering to 6%+ — all at an undemanding valuation.”
Margins have long been a point of worry for investors, but McShane is heartened not only by Target’s effort to control expenses but by the fact that shoppers are shifting back to buying higher-margin items, while inventories look healthier. Goldman Sachs’ consumer research team sees Americans buying more, bolstered in part by continuing strength in the labor market.
Investors have worried that Target is losing market share to Walmart, but McShane sees the competitive landscape differently. She says Target “will continue to benefit from taking share from traditional department stores and mall retailers, especially as Target introduces more, new product this year, continues to provide the convenience of the one stop shop, and its optionality of fulfillment.”
Just over half of the analysts tracked by FactSet rate the stock at Neutral or the equivalent. That has been a good call, given that Target has fallen by nearly half from its 2021 highs above $260. The headwinds the retailer faces have been more persistent than Barron’s anticipated when we recommended the stock in September 2022.
Still, it is hard to argue that the stock looks expensive at present. Although Wall Street isn’t upbeat about the shares, the consensus forecast for earnings per share for the full fiscal year calls for roughly 39% year-over-year growth, despite no revenue increase.
The retailer is still a long way from its pandemic-era dominance, but the stock appears to have fallen too far given consumers’ remarkable resilience and a brighter outlook for 2024. If nothing else, it seems hard to envision how Target’s situation could get worse.
Write to Teresa Rivas at teresa.rivas@barrons.com