3:03 PM, Aug 5, 2019 — Target (TGT) appears to be setting itself up to be a “survivor” in the retail sector as erosion in its margins is seen moderating in the near term, Morgan Stanley said Monday.
The firm lifted its rating on the Minneapolis-based big-box retailer to equal-weight from underweight. “We think the risk that TGT misses its margin is appropriately reflected in the stock’s relatively inexpensive valuation (around 6.7 times 2020 EV/Ebitda and about 11.5 times 2020 P/E),” analyst Simeon Gutman said in a note.
Morgan Stanley left its $67 price target steady.
Target shares were 1.3% lower amid a broad market selloff.
Gutman said the previous underweight rating was based in their view that Target had “underinvested in its supply chain (thus over earning), and its omnichannel shift would demand additional investments and result in ongoing EBIT margin pressure over time.”
Morgan Stanley said Target’s gross margin has fallen 60 basis points since 2017 because of shipping-related costs as e-commerce sales rose to 7.1% of total revenue at the end of last year.
“Now, there are signs TGT’s shipping-related deleverage is narrowing, particularly as it invests in fulfillment options like Drive Up which promote higher traffic and reduce costs,” Gutman said. “Hence, we think TGT may be past the worst of its gross margin decline.”
The analyst said Target’s sales growth has been “reinvigorated,” and they expect it remain healthy.
“The drivers have been strong merchandising, greater private-brand penetration, store refreshes and the Toys ‘R Us bankruptcy which allowed TGT to gain share in key Toy and Baby categories,” Morgan Stanley said. “Many of these initiatives (and) benefits are slated to carry over into 2019 and could support a degree of expense leverage despite wage headwinds from TGT’s move to a $15 nationwide minimum wage by 2020.”
Companies: Target Corporation
Price: 80.50 Price Change: -1.02 Percent Change: -1.26