MKM Partners analyst Bill Kirk reiterated a Sell rating on Target stock and a below-market $127 price target. The retailer’s latest quarter was “the largest beat we can recall in our coverage history,” but he believes it’s a high-water mark.
Joe Raedle/Getty ImagesTarget delivered a fantastic quarter on Wednesday. Yet Wall Street will always ask “what have you done for me lately?” That could be a problem next year, warns MKM Partners.
Analyst Bill Kirk, one of the few Target (ticker: TGT) bears, reiterated a Sell rating and a below-market $127 price target on the shares Thursday. While he admits that the quarter was “the largest beat we can recall in our coverage history,” he believes that it was a high-water mark, with the best times in the rearview mirror.
“Going forward, we expect further competitor re-openings and consumer expenditures on travel to begin to increase. This results in less discretionary dollars available for Target, a sequential problem exacerbated by reduced/interrupted stimulus checks. Consumer ammunition is decreasing at the same time options to spend are increasing.”
Kirk does think that Target has a good opportunity ahead, given how well it’s executed during the Covid-19 crisis. Yet he worries that its success obscures longer-term worries. He cites declining loyalty penetration among users of its RedCard credit cards and customer satisfaction (going by Yelp (YELP) scores) along with a large physical overlap with main rival Walmart (WMT).
The store fleet is aging, and Target’s locations are also largely in states that are more “open,” and thus its shoppers have more to choose from. He cites falling same-store sales in recent months as evidence of the allure of increasing competition.
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With the shares’ valuation near all-time highs, Kirk doesn’t think the company’s opportunities are enough to offset these worries. Ultimately Target won’t be able to keep delivering at this pace, and “then current success becomes 2021's hard comparisons.”
Of course, most investors understand that even the retailers that are winning the pandemic won’t be able to continue their white-hot streak—the question is just how quickly sales will drop off, and whether they normalize or stay at pre-2020 levels. Part of the reason Target stock soared while Walmart stock slumped post-earnings was the former showed a more gradual descent: Comparable sales were up around 30% in May, a figure that slipped to around 13% month-to-date, with the company shrugging off the lack of government stimulus.
According to data from FactSet, Kirk is one of just two analysts who have a Sell rating on Target stock, which is up more than 20% year to date. So on matter one’s take on the shares, it’s admirable to see that kind of conviction, especially given how rare bearish calls are on the Street.
Still, not many people want a repeat of 2020, even Target bulls. Perhaps then a different kind of success in 2021 will be enough.
Target is rising 0.5% to $155 in early trading.
Write to Teresa Rivas at teresa.rivas@barrons.com
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Target’s Success Could Come Back to Haunt It. Here’s Why. - Barron's
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