Susquehanna Upgrades Target, 'A Long-Term Survivor Of The Ongoing Retail Apocalypse'

Target Corporation TGT's ongoing turnaround initiatives earned the retailer an upgrade from Susquehanna Financial Group on Wednesday. 

The Analyst

Susquehanna's Bill Dreher upgraded Target's stock rating from Neutral to Positive with a price target boosted from $54 to $84.

The Thesis

Target's biggest hope for a successful turnaround is a focus on exclusive brands where it won't face any competition, Dreher said in the upgrade note. (See the analyst's track record here.) 

Target appears to have hit the mark in this category, and the addition of multiple exclusive brands should help the company reach its "very achievable, and frankly beatable" fiscal 2018 guidance of a low-single-digit comp, the analyst said.

Target's management team is retiring older brands in favor of private label ones in high-strength categories, according to Susquehanna. 

Behind the scenes, Target is working oimproving its inventory management, Dreher said.

"Target is working to move to a place where they only push, say, 40 percent of an apparel set to the store, and then replenish with the remaining 60 percent of inventory," the analyst said. "That's a big opportunity for Target, but also requires a fundamental change in the supply chain." 

Target's smaller format stores are around 20 percent the size of a traditional store, but "much more" productive on a sales-per-square-foot basis at $600, which is double Target's average, Dreher said. The smaller format stores also generate higher gross margins given the exposure to higher-margin categories, he said. A continued focus on the new format "makes a lot of sense" in light of limited competition from discount stores, and offers a geographic separation from closer rivals like Wal-Mart Stores Inc WMT, Dreher said. 

Target's stock valuation implies it is a "department store that happens to sell food (and not very well at that)," the analyst said. Once the market begins to appreciate Target's strengths and status as a viable omnichannel company and a survivor of the "retail apocalypse," the stock can move higher to, at the very least, "approach that of the discount store average," he said. 

Price Action

Shares of Target were trading higher by 2.68 percent Wednesday afternoon. 

Related Links:

Analyst Echoes Predictions Amazon Will Buy Retailer: 'Downtrodden Big Box, Department Store Player'

Amazon To Buy Target? That's Loup Ventures' 'Boldest' Prediction For The Year

Photo by Mike Kalasnik/Flickr.