Shares of Target Corp. have faced challenges this year due to concerns about weaker customer traffic and sales in the face of higher prices. However, BofA analysts believe that the situation could improve for the retail chain as it takes steps to stock up on new products and remodel its stores next year.
Analysts Upgrade Target to Buy
BofA analysts have upgraded Target from neutral to buy and have raised their price target to $135 from $120. As a result of this news, shares of Target saw a 1.2% increase on Thursday.
Shift in Retail Landscape
This upgrade comes at a crucial time for retailers as they prepare for the upcoming holiday season. In recent months, there has been a decline in prices for clothing and electronics as retailers try to sell off excess inventory. Last year, higher prices for groceries and other essential items left discretionary items languishing in store back rooms and warehouses, leading to price cuts in order to entice shoppers.
However, the BofA analysts believe that these trends, which have benefited customers but hurt retailers’ profits, are now becoming a thing of the past.
Potential for Improved Sales
In their research note, analysts Robert Ohmes and Molly Baum highlight the potential for Target’s ticket comps (comparable store sales) to turn positive. They suggest that improved sell-through on lower inventory levels across the store and reduced promotions could contribute to this positive change. Additionally, a recovery in discretionary spending next year would also benefit Target because of its significant exposure to the Apparel & Home categories, which make up more than 30% of combined sales.
Exciting Developments
The analysts also highlighted exciting developments in Target’s lineup of new products. They mentioned the launch of Target’s new kitchen brand, Figmint, which took place last month. They also mentioned Target’s upcoming partnership with jewelry brand Kendra Scott, set to launch on Oct. 20. In addition to these new product offerings, Target is planning to remodel 175 stores this year.
In conclusion, the analysts at BofA see potential for improved performance for Target Corp. in the coming year, driven by new products and store remodels.
Target Looks to Increase Transactions and Margins
Target recently hosted Target Circle Week from Oct. 1 through Oct. 7, which is expected to boost transactions, according to BofA analysts. Additionally, Target has introduced a new feature that allows customers to add a Starbucks order to their drive-up pickup order, which is set to drive more digital traffic. With over 1,700 stores featuring Starbucks cafes and drive-up service, the convenience factor is expected to attract more customers.
The BofA analysts also mentioned several key factors that are likely to improve Target’s margins in the coming period. These include the easing of freight costs, which have been impacted by the supply-chain logjam in 2021 and 2022. Target is also reducing costs associated with its efforts to decrease its stockpiles of unsold goods. The company is in the process of establishing sorting centers and aims to shift its focus back to more profitable in-store and same-day digital transactions.
Furthermore, the analysts noted that “shrink,” which refers to items lost due to theft, fraud, or employee error, may be reaching a plateau. Target recently revealed that it faced cumulative profit pressure of more than 1 percentage point from higher shrink since 2019. During the first five months of 2023, Target experienced a significant 120% increase in theft incidents involving violence or threats.
The rise of smash-and-grab robberies and organized retail theft has been a concern for retail executives over the past year. In response, Target announced the closure of nine stores in four states due to increased theft. While overall shrink levels remained in line with 2019 figures according to the National Retail Federation, there is growing worry about the violence accompanying such incidents.
Target’s stock has experienced a decline of 27% this year, in contrast to the S&P 500’s 14.4% increase during the same period.
