Biggest risks for Target’s stock in this retail environment

Retail giant Target (TGT) posted positive fourth-quarter earnings results on Tuesday, causing shares to jump in early morning trading. Yahoo Finance Executive Editor Brian Sozzi spoke to CFO and COO Michael Fiddelke this morning about the company's growth outlook tied to stores and the chain's biggest competitor challenges.

JHA Senior Research Analyst Jessica Ramirez joins Yahoo Finance to discuss the risks to Target's stock and how it can face mounting challenges amidst high inflation and retailer competition.

Ramirez outlines what Target is doing well which may help the store chain offset certain obstacles:
"Their cost-cutting savings and being much more strategic in the way they run their business. We know discretionary isn't doing well. That is the majority of their business. They've been leaning more towards beauty categories, home essentials... If you look at the assortment that they drive across those categories, it's very strong. They bring in very niche brands that consumers are leaning more towards... In terms of inventory as well, they really have tracked that to be... more tighter and run much more productive assortments even in the categories where there is difficulty."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

RACHELLE AKUFFO: Good to have you, Jessica. So there seems to be more headwinds for retailers in this uncertain backdrop. Talk to us about the five biggest risks that you see for Target shareholders.

JESSICA RAMIREZ: I think, as you said, we've had some-- it's mixed results, really, what we've had from Target. But I think there's still a lot of pressure for Target and just in the retail space that's geared towards consumer discretionary.

And it's still a very difficult backdrop for the consumer, especially, if you look at low-income and middle-income consumer. There's still a lot of pressures out there that are affecting the way they shop. And you could clearly see that through what we noted the number of transactions, and the average, as well, that was down year-over-year.

So, again, that I think shows the pressure that the customer is still feeling out there.

AKIKO FUJITA: Even with that said, we're seeing a big pop in Target shares today. Up nearly 12% right now. At least in the short term here, given some of the headwinds that you just highlighted, where do you think the stock tracks?

JESSICA RAMIREZ: So I think it's a lot of the strategy that Target has done. Again, their cost cutting savings and just being much more strategic in the way that they run their business. So we know discretionary isn't doing well. That is the majority of their business. They've been leaning more towards beauty categories, home essentials. And those are repeat categories.

And those, again, that if you look at the assortment that they drive across those categories, it's very strong. They bring in very niche brands that the consumer is leaning more towards. Again, consumer interest focused. So that has done very well for them.

In terms of inventory as well, they've, really, have tracked that to be more tighter and run much more productive assortments, even in the categories where there is difficulty. So we're seeing at having good inventory and productive inventory, you'll have less promotion.

So we track promotions in inventory and pricing. And we've seen that, really, with promotions, they've been very strategic. So only promoting what isn't moving and keeping full price out what is moving. Again, I think, that's the result of what we're seeing in terms of gross margin.

So that, in short term, is positive. And I think even long term, they're just running a very nimble business. Also, we're hearing there's more investments in evolving their omnichannel strategy, which is perfect. Continue to have a seamless operation in terms of AI, in terms of store productivity.

Again, all of those short term and long term, I think, are great. And that's really what we like to hear, because you do have to continue to evolve your experience and continue to evolve in order to survive climates like this. And when we do have a stronger consumer shopping, they'll definitely gain even more off of that.

RACHELLE AKUFFO: So Jessica, as you look at the more budget conscious consumer, then, if you're a shareholder, why would, say, a Target be more appealing than trying to invest in a Walmart or another retailer?

JESSICA RAMIREZ: Well, I think with Target, long term, they have always been very consumer-centric. Where we saw the fall at Target a year ago a bit more than that was inventory problems. And also, they were a retailer that does tend to skew more towards the higher income. And it's always a fun place to go.

So I think there's just a lot of legs in their business long term. And they are set. I think they're a very smart, agile business in the way they've run their inventory and just strategy overall.

They are one of the first retailers, I think, as an effect of Amazon that invested very heavily in digital very early on. And really, when we were in the pandemic, that really took off. Omnichannel was excellent for them. They really had the advantage of that. And I think they're gearing up with that again, like I said, with evolving their business.

So for the quarters, we have been neutral just because we are very cautious. That traffic is down so far across the retail landscape in this year. I have seen traffic to be down in January and February. I think Target is not part of-- is part of that as well. Sorry.

But, again, long term, if we're evolving the business, and we do see all of this traffic come back, they will be winners.

AKIKO FUJITA: Jessica, that's an interesting take, because we've heard from so many analysts that Walmart, because it's a little more diversified, especially, on the grocery side, is maybe better positioned in the face of consumers turning a little more cautious.

When you look at these two particular names, which do you like better?

JESSICA RAMIREZ: In terms of this current moment, because Walmart does have more staples and is grocery, we do like that story. Again, they also do offer value with a lot of grocer. And that is key right now with the consumer as a priority of why they're shopping, the way they're shopping, and, again, pulling away from discretionary.

I think long term, when that consumer does come back to discretionary, Target does have a much stronger assortment. And it's been known for that fun play. Today, they talked about it on their call. You can't go into Target without just buying one thing. You come out with so many other bits. And they add that fun.

So, again, once that consumer does come back long term, I do really like Target. Again, for the climate that we're in now, as long as there is still inflation and food, and that is still a major concern for that lower budget customer, Walmart does have a favorable point.

AKIKO FUJITA: Jessica Ramirez, Jane Hali and Associate senior research analyst. Good to talk to you today. I appreciate the time.

JESSICA RAMIREZ: Thank you.