Analyst Corey Tarlowe upped his rating on the retail giant to a Buy having previously had it as a Hold. He’s optimistic about Target working through its ongoing margin issues, driven by inventory growth outpacing sales growth for the past three quarters. He noted that inventory is already lower in the areas that typically require margin-pinching markdowns, which bodes well for the overall progress. 

Bullish Comments

In a note to clients he wrote that “while margins continue to face pressure from the clearing of excess inventory as well as elevated supply chain costs and product cost inflation, we view these as largely near-term headwinds. Looking ahead to next year, we believe Target’s margins are likely to benefit from lapping the self-inflicted markdown pressure related to excess inventory as well as lapping elevated supply chain and product costs as commodity prices and container costs decline."

Like with many of the stocks Marketbeat is covering at the minute, there’s a strong case to be made that most of the downside is already baked into Target’s share price. This is a theme that Tarlowe and his team picked up on, and they made the point that the brunt of the downward earnings revisions is likely already in for Target, which could mark a bottom for Wall Street expectations. Lower freight costs and improved e-commerce efficiency are anticipated to also be margin boosters, while the partnerships with Ulta Beauty and Disney are seen as top line drivers.

But the stock doesn’t come without its risks. As inflation readings continue to scare investors with worse-than-predicted numbers, any stock with a semblance of exposure to consumer spending has felt the brunt of the selling. Target, with its market position as a middle-of-the-road retailer, more upmarket than Ross (NASDAQ: ROST) but not quite Macy’s (NYSE: M), is very much in this camp. Hence the 50% haircut shares have already been experienced since setting all-time high last November. 

However, for those of us who managed to avoid that drawdown, there’s a solid opportunity in the works now, and Q4 is shaping up to be one of Target’s better quarters of the year. Along with an upgraded rating, Jefferies also slapped a fresh price target of $185 onto their shares. Considering they closed at $157 last night, that’s suggesting there’s a move of some 20% that they’re expecting shares to make to the upside in the coming weeks. This will take them into the crucial holiday season, where all eyes will be on the numbers coming from the Black Friday sales as well as the post-Christmas period. 

Competitive Positioning

It’s not just Jefferies who are eyeing the upside here either. The folks over at KeyBanc Capital Markets were out with similar comments last month and similar expectations for Target to pick up pace into the holidays. Bradley Thomas and his team initiated coverage with an Overweight rating and a $200 price target, one that points to even greater upside than what Jefferies are suggesting. Thomas based his bullish stance on the company’s competitive positioning, writing that “while investors can find better growth potential in smaller companies, we believe both Walmart and Target are in the best competitive positioning of the past decade, given the pandemic’s catalyst of e-commerce becoming significantly more important".