The Minneapolis-based retail chain has already warned investors that cost pressures, caused by the pandemic-related disruptions, are hurting its gross margins as the retailer avoids passing on full costs to consumers in an effort to protect its market share.
The company’s gross margins fell 2.6 percentage points to 28% in the third quarter. Analysts had been expecting 29.9%, based on the average of analyst estimates compiled by Bloomberg. Such pressures, when consumers have otherwise been spending quite robustly, have hurt Target’s investment appeal.
The stock, which closed at $199.22 on Friday, has fallen about 25% since mid-November, signifying investors’ focus on margins which show how profitable the growth in sales is. The nation’s largest retailers benefited immensely from waves of pantry-stocking by American consumers during the pandemic.
This had resulted in massive spikes in sales of some categories, like toilet paper, snacks, and cleaning products. The demand surge was so strong that in the last fiscal year, Target increased revenue by more than it had in the previous 11 years combined.
Despite pressure on margins, the majority of analysts remain bullish on Target’s future prospects due to the company’s superior online capabilities and its market share gains during the pandemic.
The willingness of its customers to keep coming to Target stores is the result of Chief Executive Officer Brian Cornell’s efforts to turn around Target’s retail outlets. He spearheaded the remodeling of hundreds of stores, introduced many affordable fashion brands and bolstered the retailer’s e-commerce offerings.
During the pandemic, Target has been using its stores more as mini distribution centers for its booming digital business, to better fulfill online orders.
In a survey of 32 analysts by Investing.com, 23 rate TGT stock as “Outperform.”
Chart: Investing.com
Among those polled, the consensus 12-month target for the stock was $267.73, implying 34% upside potential.
In a recent note, RBC named TGT stock a top pick, saying the stock should earn a higher valuation in the months ahead. Its note said:
RBC, which has $278 per share price target on TGT, also said:
Bottom Line
During tomorrow’s report, Target may again show that higher prices are hurting its margins—which have become the focus of investors’ attention during the past three months. Nevertheless, in our view, this short-term challenge shouldn’t discourage long-term investors from holding this quality retail stock in their portfolios.
This article was originally published here.
