Target's Risk-Reward Is Getting Better, Analyst Says In Bullish Turn On Retail Stock

BofA analyst Robert F. Ohmes upgraded Target Corporation TGT to Buy from Neutral, raising the price target to $135 from $120.

The analyst remains remarkably upbeat about the company's Gross Margin upside opportunities, likely to be generated from freight & transportation cost recovery and the non-recurrence of various inventory reduction costs.

In addition, the continued rollout and ramp-up of flow centers and sortation centers and the shift back to more profitable in-store and same-day digital transactions are likely to boost gross margins, writes the analyst.

TGT shares have declined 19-20% since the end of July (vs. the S&P down -5%), and with the stock trading at just 12x 2yr forward earnings, Ohmes thinks the stock's risk/reward outlook has improved.

According to the analyst, TGT's digital traffic could accelerate from current levels driven by Target Circle Week, the addition of Starbucks Corporation SBUX & returns to Drive Up, and the remodel of TGT's online experience (which began rolling out in F3Q).

New products, new brands, and continued remodels should help traffic recovery into next year as TGT continues to "create value in stores for guests," the analyst adds.

Ohmes also sees potential for TGT's average transaction size comps to turn positive given an outlook for less clearance vs. LY, potential for improved sell-through on lower inventory levels across the store, and fewer promotions. 

According to the analyst, the company's $2-$3 billion multi-year cost savings program should also support SG&A and COST improvements. 

A recovery in discretionary next year would also favor TGT given high exposure to Apparel & Home categories (over 30% of sales combined). 

On the flip side, downside risks to the price target are gross margin pressures from labor costs, investments, the rapid growth of the lower-margin e-commerce channel, and aggressive competition from competitors.

Price Action: TGT shares are trading higher by 1.13% to $110.21 on the last check Thursday.