Target stock: Is it time to buy again?
Yahoo Finance Live’s Brian Sozzi discusses Target stock and provides his take on the retail giant ahead of earnings.
Video Transcript
JULIE HYMAN: Bullish on Target. Oppenheimer initiated coverage this morning with an outperform rating and $190 price target. The analyst saying that they see potential for a strong multi-year profit recovery. The bullishness caught the attention of Sozz. That's where we find his take today.
BRIAN SOZZI: Well, any time you write a 75-page research report, as this was, it definitely catches my attention as someone who used to write these. Let's start on Target here. The bull case for Oppenheimer on Target essentially boils down to three things. They see Target's inventory position starting to improve as the year goes along. Of course, Target was stuck with a lot of excess inventory. And they warned about that towards, really, last summer. And then it seemed to get worse going into the third quarter.
They also see freight costs starting to cool down a bit, as inflation comes off its peak. That's a good thing not just for Target, but a lot of other retailers that ship large quantities of goods like Walmart, you name it, Costco. Also cost cuts boost profits. Target has started to pull back on some of their expansion initiatives, notably-- not necessarily the amount of store openings, but just their manufacturing-- their distribution center footprint. They were rolling that out very aggressively across the country, little distribution centers to get packages to people's houses quicker. They've started to pull back on that a little bit.
Now my guide here on when you may want to consider nibbling on Target shares-- and of course, like I always mention, I'm not telling you to buy, sell, or hold any stock-- this is just how I would approach thinking about Target if you are inclined to own a name like this, a consumer name like this. First, you visit a Target store, and the store doesn't feel stuffed with inventory. Sometimes, in retail analysis, it could be that simple.
And I think-- I really like what Jonathan Johnson over at Overstock just told us. It could be a tale of two years for these retailers, where they used the first half of this year to clear a lot of excess inventory, maybe worn again, reset guidance and reset expectations, and then enter the holiday season for this year in a much, much, much cleaner inventory position and show some better margins.
Number two, there's a clear pivot to better consumer spending data. The consumer data right now, I would argue, is not exactly bullish on a lot of retailers notably that skew towards the higher end consumer like Target does. Yes, they are a discounter, but they do get a higher income shopper into that store compared to a Walmart and the dollar stores. And then lastly, inflation comes closer to the Fed's 2% goal and rate hike stop. That, just on paper, will-- or theoretically, should make it a little bit cheaper for consumers to go visit Target and stock up on their daily essentials.
My take here, it's one of my favorite stores I went to Target last weekend, coming back from the World Economic Forum here with Julie. I did my shopping. I can get it all done in one place. But the next earnings report from Target in a few weeks could be rough, and not just rough in terms of the quarter here, guys. There is a sense on the Street that they might reset earnings expectations one last time, despite a series of warnings, and that maybe the Street hasn't factored in another potential warning from Target in a few weeks. The other key catalyst after earnings-- February 28 analyst day for the company.
BRAD SMITH: Yeah, some of what we can expect with Target's earnings may have already shown up in some of the retail sales data as well when you look at some of the discretionary categories. And Target has leaned into making sure that anything in the home category or the apparel category as well, that that moves in through consumers, but those were some of the more challenged categories within the most recent December report, too.
BRIAN SOZZI: Right, and I'll just-- Target is still one of the best run retailers in the game.
BRAD SMITH: Yeah.
