Target Analysts React To Pandemic Business Update, Credit Suisse Sees Long-Term Positives

Department store Target Corporation TGT released a business update on sales trends Wednesday as shoppers flock to stores to stock up in the face of a pandemic. 

Target's Update

Target said it is experiencing "unusually strong" traffic and sales, especially across food, medicine, cleaning products and panty stock-up items.

Other areas of strength include in-home activities such as home office and entertainment. Sales of apparel and accessories "meaningfully" softened over the same time period.

To-date in March, total comparable sales were up more than 20% above last year, but ongoing sales declines in the high-margin categories could translate to weaker gross margin dollar performance throughout the rest of the quarter, the retailer said. 

Target also expects to add more than $300 million of incremental costs versus its prior first quarter outlook from investments in pay and benefits, merchandise volume growth, more rigorous cleaning policies and other similar coronavirus-related costs.

Target withdrew its prior guidance for first-quarter and full-year 2020 sales, operating income and EPS.

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Credit Suisse's 7 Target Takeaways

Target is among the first large retailers to offer an update since the virus outbreak, and the longer-term implications are "positive" for the stock, analyst Seth Sigman said in a Wednesday note.

The analyst named seven takeaways from the release:

1. Sales were "significantly" higher after tracking in-line with expectations in February.

2. Target is able to fulfill high levels of demand across essentials and food and beverage.

3. Home office and entertainment and other hardline categories could continue seeing strength, although unlikely at the current run-rate.

4. Total quarter-to-date comps are likely trending at 10% to 12%.

5. Gross profit dollars will likely come in higher, but gross margins could see a 100-basis-point negative impact.

6. Incremental opex of $300 million implies modest SG&A deleverage.

7. Based on the math behind management's update, first-quarter EPS should come in between $1.55 to $1.60 versus the consensus estimate of $1.66. EBIT should also grow slightly.

Sigman maintained an Outperform rating on Target with an unchanged $125 price target.

UBS Says Target Will See Growth Next Year

Target's announcement also includes a revision to its store remodeling plans. The company said it will complete ongoing store remodels, but move those that haven't started yet to next year.

A total of 130 stores are set to be remodeled in 2020 versus a prior estimate of 300. Also, the company said it will open 15 to 20 new small store formats this year, down from the 36 previously announced.

Target deserves credit for its "smart" decision to limit remodeling activity, as it allows management to better focus in the current environment, UBS analyst Michael Lasser said in a Wednesday note. Shifting plans to 2021 should also provide comp visibility to next year, the analyst said. 

Over the near term, Target should be able to capture a "disproportionate share" of government stimulus checks as consumers could shop before other retailers have a chance to open, Sigman said, putting an "upward bias" on comps.

UBS maintained a Neutral rating on Target with a $115 price target. 

The stock was down 5.4% at $95.39 at the time of publication.

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