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Why Target’s lack of 2021 guidance makes sense

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Michael Baker, MD and senior research analyst at D.A. Davidson, joins Yahoo Finance to share his perspective on Target’s quarterly earnings and 2021 outlook.

Video Transcript

- Let's talk more about Target in particular. Michael Baker is joining us now. He's managing director and senior research analyst at DA Davidson.

Michael, thank you for being with us. You said in a note that target set a high bar and then it came in above that bar. I'm curious how that momentum is going to continue and where you see the company really continuing to grow its sales.

MICHAEL BAKER: Well, they do have momentum and one way you see that is recall that they preannounced a 17% holiday comp. That was for the months of November and December. And then the full quarter, which now includes January, was up 20.5%. That implies about a 30% comp for the month of January.

So clearly things are strong and actually getting better. And as Brian said, we'll hear a little bit maybe on February as well. But we think January was helped by stimulus, probably helped by weather as well. We do expect that momentum to continue in 2021 and we think they'll continue to show strength on the omnichannel side, some of the brands that they've been able to build, both from a own brand and national brand perspective. And they are opening stores, which is pretty rare these days for big cap retailers.

- Michael, as Target stock peaked, look at the year they put up this year. Double digit comp growth every quarter, triple digit digital growth. Where's the catalyst to drive it higher this year?

MICHAEL BAKER: It does get harder from here, no doubt. And we expect that the comps will start to decelerate as you lap up against some of these big numbers later in the year. But we still think the stock can work and have upside to our price target. Trading at 20 times forward estimates right now, not a cheap stock but actually below Walmart, below a name like Tractor Supply. Only in line with a name like Home Depot.

It's not overly expensive and we think that estimates could go up this year. Again, the cost will moderate, but we think that they could be on the positive side which would beat consensus estimates because of the momentum that they have in this year that they have picked up. Sometimes that a share tends to be sticky and we're seeing that, I think, already in the results in the calendar 2021 year.

- You know, Mike, you highlighted in your note to us that the company's decision to not issue guidance could weigh on the stock, at least in the mind of investors. I guess as an analyst covering the retail space, when you see a management team decline to offer guidance in this kind of environment, is it still, you know, in your view, like well, it's a pandemic. It's hard to have visibility here. Or are you expecting managements in March of 2021 to be able to offer something like a roadmap for the next couple of quarters?

MICHAEL BAKER: Yeah. I get what Target's doing. It is a little bit conspicuous in its absence in that many of the other big cap retailers like Walmart, Home Depot, Lowe's, the several that have reported in the last few weeks have given guidance. That said, every management-- every other management that has given guidance has certainly caveated it with a lot of wide range of outcomes and we don't really know.

So I don't feel like there's a lot of precision in the guidance that the companies are giving and that's not the fault of the management team. I think the management teams are doing their best to put out the guidance, but who really knows in this environment? So in that sense, Target not giving guidance, it does kind of make sense to us. The point of what I said in my note, though, is that it is a little bit different than what some of the other big box retailers have said in their fourth quarter reports about 2021. They are giving guidance, but with a wide degree of variables in there.

- Michael, is this going to be the year of the activist investor coming in and trying to shake up retail? I'm sure you've been watching the situation at Kohl's. That looks like it's about to get very ugly, but there's a lot of other management teams throughout retail that have been there for at least five years. They have seen their stock price under pressure, they've closed a lot of stores and the stock really hasn't reacted.

MICHAEL BAKER: Well yeah, I think John has done a great job in some of his previous activist campaigns, and I know John well. And so I won't comment specifically on the Kohl's situation, but we're certainly seeing a shakeout in retail and that's been going for years and I think the pandemic has helped accelerate that. And some retailers have done very well through this pandemic and the strong have gotten stronger. Others that haven't done well, I think there will be a lot of pressure on them to figure out where they go from here. Department stores are a perfect example of that.

- Definitely. Michael Baker, we will continue to watch those companies as well as Target. Thanks for your perspective this morning. Michael Baker of DA Davidson.