As a long-term income investment, TGT investment thesis remains good
We introduced Target before (NYSE:TGT) discussed its oversold status in June 2023 due to lower FQ2’23 forward guidance and a $1.1B impact on FY2023 gross profit Growing shrinkage problem.
Excess inventory levels, deteriorating balance sheets and rising long-term debt have exacerbated these issues, creating further headwinds for the short-term outlook as the interest rate environment continues to be elevated.
Currently, TGT has another mixed quarter in Q2’23, with revenue below $24.77B (-2.1% QoQ/ -4.9% YoY) but adjusted EPS of $1.80 (-12.1% QoQ/ +361.5% YoY), with sales headwinds attributed in part to Pride-related boycotts.
The gross profit margin in the second quarter of 2023 was -0.9 percentage points, and the gross profit margin was 28.2% (+0.8 percentage points quarter-on-quarter/+5.6 percentage points year-on-year), and these impacts were well balanced, with a boost at the end of the year As can be seen from the significant improvement in month-on-month and year-on-year profit margins, its price reductions are relatively large.
While TGT’s latest quarter inventory levels are still slightly above $12.68B (-17.2% QoQ/YoY), compared to FY19 levels of $8.99B, we’re not overly concerned as we don’t expect another round of Inventory cleanup.
Management has committed to an operating profit margin target of 6% in fiscal 2024 and will expand the profit margin to 5% in the second quarter of 2023 (-0.3 points quarter-on-quarter/+3.7 points year-on-year).
Furthermore, while excess inventory and subsequent price cuts previously triggered a deterioration in Mingqitong’s balance sheet, we believe the situation may soon improve.
Due to improved profitability, management has been able to pay down $1.03B of debt, reducing the total to $15.05B by FQ2’23 (-6.4% QoQ/ +11.8% YoY), while increasing cash/short-term investments to $1.61B (+ 21.9% QoQ/ +40% YoY), with an annualized dividend payout of $4.40 per share (+1.8%).
Annualized net interest expense of $564 million also experienced the same sequential slowdown (-4% sequentially/+25.8% year-over-year). While it may face higher floating rates for the time being, we may see inflation and interest rate headwinds easing from these peak levels, with Morningstar already expecting the Fed to pivot from February 2024.
TGT investors need not be overly concerned about the temporary impact on its FCF margins, which were 1.5% vs. LTM (up 1.2 pp sequentially), as these are primarily attributable to its 5.83B increase in capex (up 23.5% sequentially).
The retailer is currently well-positioned to cover these expenses as its operating cash flow is in excess, with LTM of $7.46B (up 45.1% sequentially).
These intensified capital expenditures may also ultimately add to the top and bottom lines due to expansion of physical locations/sorting centers and increased efficiency in logistics operations. In addition, partner experiences have been added, including Ulta Beauty (ULTA), CVS (CVS), Levi’s (LEVI), Apple (AAPL), Disney (DIS) and Starbucks (SBUX).
So while its comparable store and digital sales were down slightly, we believe things could improve as TGT expands its same-day delivery and drive-thru in-store services to compete directly with Walmart (WMT) and Amazon (AMZN) Get better. .
Given that valuations are too high during the pandemic, correction is urgently needed
TGT 5Y EV/revenue, P/E and market cap/free cash flow valuation
Currently, TGT trades at NTM EV/Revenue of 0.69x, NTM P/E of 14.40x, and NTM Market Cap/FCF of 19.16x, below its 1-year average of 0.79x/17.01x/20.45x, but close to pre-pandemic levels The 3-year averages are 0.69 times/14.18 times/15.26 times respectively.
This means that the recent correction has had the desired effect of normalizing most super-pandemic valuations, as shown in the chart above, providing a better entry point for interested investors.
Consensus forward estimate
TGT’s forward forecast also remains excellent, as it indicates normalized top-line and bottom-line CAGR of +6.2% and +8.1%, respectively, from fiscal 2019 to fiscal 2025, a healthy pace of growth. Compared to pre-pandemic levels, they were +0.9% and +6% respectively.
Compared to pre-pandemic levels of $78.11B (up 3.7% year-over-year) and fiscal 2019 levels of $6.39 (up 18.6% year-over-year), the pandemic has indeed been good for the retailer, as measured by projected improvements in its revenue and adjusted EPS see, differentiate,
As a result, while TGT has had to temporarily lower its fiscal 2023 adjusted EPS guidance to the midpoint of $7.50 (up 24.5% year over year) due to the backlash, compared to the previous guidance of $8.25 (up 37% year over year), We are not overly concerned as these are temporary headwinds.
Management has reported “meaningful recovery in July 2023,” with the Independence Day holiday and members-only sales from July 9-15, 2023, generating more than 1.5 million new members.
So Is TGT Stock A Buysell, or hold?
Mingshitong 5-year stock price
Assuming consensus forecasts turn out as expected, the forecast long-term price target of $146.73 is not overly ambitious based on an NTM P/E ratio of 14.40x and a consensus adjusted EPS forecast of $10.19 for fiscal 2025. There is still significant upside potential of +19.8% due to the recent correction.
Therefore, while TGT stock may be down significantly from its previous 2H21 highs, we remain cautiously confident in management’s focus on top-line/profit growth, network expansion, value-added services, and optimizing operating efficiencies.
Investors also don’t have to worry about the safety of its dividend, as the retailer is expected to continue generating positive free cash flow through fiscal 2025, with Seeking Alpha Quant currently rating it a B grade.
However, TGT investors must also note that this adjustment may not be over yet. For example, the stock has made lower highs and lower highs since the recent FQ2’23 earnings call and is now retesting its key support at $120.
Although TGT’s “July and August 2023 traffic and comparable sales” improved, market sentiment appears to be turning bearish as federal student loan repayments begin in October 2023.
Investors may want to watch longer due to potential volatility. Assuming its key support level is breached, we could see TGT stock retrace to the next support level between $102 and $112, which would imply a -13% downside from the midpoint.
On the other hand, lower levels could also see the forward dividend yield expand to 4.15%, compared with the historical yield of 2.03% and the industry median of 2.72%.
So, depending on their risk appetite and dollar-cost averaging, investors may want to time their purchases accordingly, as it remains to be seen whether the current bottom holds.