Down +50%, is Target a Buy?

[View in browser]( [The Spill Logo] Proprietary Data Insights Financial Pros’ Top Discount Store Stock Searches in the Last Month Rank Name Searches #1 'Dollar General Corp 237 #2 'Target Corp 116 #3 'Costco Wholesale 86 #4 'Dollar Tree Inc 74 #5 'Wal-Mart Stores 54 #ad [Stay Ahead, With a Daily Dose of Investing Insight]( Brought to you by [Intelligence Report]( [The New Billion-Dollar Monster]( [Intelligence Report - The New Billion-Dollar Monster]( See this tea's steep potential growth into an $86 billion sector. Investors are moving. This team has previously experienced an 111,000% rise. Can they do it again? The beverage market is a cash cow, and it's about to be devoured by a new 'Monster.' [Learn more about the next billion-dollar beverage investment.]( Down +50%, is Target a Buy? This was the question asked by one of our readers…and it’s a good one. Did you know you can send in a stock you’d like us to evaluate? All you have to do is [CLICK HERE]( or at the bottom of this newsletter in the feedback section. Target is a great company and consistently one of the top searches by financial pros looking at the stocks of discount retailers. But there are good reason shares have collapsed since the high in 2021. We’ll explain why that is and whether we believe this is the time to step into the stock. Target’s Business Considered the ‘upscale’ discount retailer, Target is a one-stop-shop retailer offering everything from groceries to apparel to electronics. It hits the unique trifecta of quality, value, and convenience. [Total 2022 sales] [Source: Target 2022 Annual Report]( In its retail empire, Target provides various services, catering to customers who demand more than just great products. Same-day delivery? Check. In-store pickup and drive-up? You got it. Not to mention Shipt, Target’s personal shopping service. Little-known fact: Target pioneered omnichannel retailing, melding the physical and digital realms for a seamless customer journey. Since 2021, Target’s stock has been in freefall, down slumping over 50% from its all-time highs. The company has struggled with declining sales, increased theft, inflation, excess inventory…just about everything that could go wrong has gone wrong. Analysts worry the decline in consumer spending, which is due to a revenue slowdown and compressed margins, won’t let up anytime soon. We believe that’s overly pessimistic and discounts Target’s ability to manage expenses when needed. Financials [Financials] Source: Stock Analysis Revenues showed significant weakness, declining YoY in 2023. We expect erosion to continue in durable goods, apparel, and electronics over the next year. However, food and beverage is unlikely to see a meaningful drop. Taken together, this will likely push margins down even further for Target, While debt has increased, the total interest expenses have barely budged. Capex will hit $4 billion to $5 billion this year as management opens new stores, refreshes old ones, and invests in supply chain enhancements. With almost $8 billion in cash from operations, the dividend is more than covered. Valuation [Valuation] Source: Seeking Alpha Target was trading close to 20x at its height in 2021. While it’s cheaper now, it’s not where we’d like to see it. Dollar General (DG) is cheaper. But as a whole, all the discount retail stocks trade at lofty multiples. Where Target does shine is its price-to-operating cash flow ratio. However, it’s worth noting Target’s price-to-free-cash flow ratio is about 30x. When the stock peaked, it was closer to 10x. Growth [Growth] Source: Seeking Alpha Target also suffers from a growth problem. Every other retailer, from Walmart (WMT) to Costco (COST) expects sales to increase this year in the high single digits. Target isn’t sure they’ll do better than flat. The company has also seen its EBITDA and EPS decline for the last several years, while companies like COST keep delivering YoY improvements. Profitability [Profits] Source: Seeking Alpha Profit-wise, Target’s gross margins aren’t bad relative to its peers. However, its EBIT margins have shrunk along with its net income margin. The negative free-cash-flow margin is concerning. [All eyes are on Real Estate & Private Equity as investors hedge against inflation.]( Know the market's next move with the latest Alternative Investment news and trends when you sign up for The Alt newsletter for FREE! [Subscribe now.]( Our Opinion 7/10 $88-$90 is where we see Target’s stock headed. There’s technical chart support at that price, and the dividend yield would hit 5%. It’ll be a while before things turn around for Target and most other retailers, likely when the Fed finally punches the economy into a recession, inflation falls, and we get to the end of the tunnel where things start to rebound. 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