Is Target Stock Aiming for a Breakout in 2023?

 | Mar 01, 2023 03:11AM ET

  • Target beat on the top and bottom lines but failed to impress with its guidance.
  • The dividend is safe and growing in 2023.
  • Analyst sentiment may cap gains in the near to mid-term.

    • The answer is probably not soon when Target Corporation (NYSE:TGT) breaks out of its trading range. Several factors could hold the market back in 2023, but this is an opportunity for long-term investors. The declining outlook for earnings, valuation, and tepid analyst activity may keep the stock range-bound this year, but the long-term outlook is bright. The company says it is on track to recoup its pre-pandemic margins and may surpass that level in 2024.

    This means a rebound in price action is brewing, although it may take a few more quarters to play out. Between now and then, investors can target technically appropriate entry points within the range to use as entry points for building a position. The stock yields a healthy 2.6% while trading at current levels and comes with a positive outlook for distribution increases and share repurchases.

    h2 Target, Strong In Q4 But Guiding Weak For 2023 /h2

    Target’s Q4 results and outlook confirm a trend driving the retail market for the last two years. The underlying strength in the economy drives better-than-expected results despite the post-pandemic slowdown, but a cliff is fast approaching. The company’s guidance suggests that consumer trends will slow dramatically across the retail and consumer landscape in 2023, and the depth of the pullback is yet to be plumbed.

    Considering the heights of the post-pandemic peak and the amount of momentum we’re still seeing, the pullback could accelerate to a comparable level. Until then, Target reported solid revenue and earnings for Q4 despite the heavy impact of markdowns and promotions.

    Target reported $31.48 billion in revenue for a gain of 1.3%. Interestingly, the gains were driven by a 0.7% increase in comp store traffic the company says is all volume. Same-day services were also strong, e-commerce, and grew by 4.3% YOY to account for 10% of the revenue.

    Margins contracted at levels, however, as inventory-clearing activities, higher costs, and increased shrinkage cut the bottom line. Shrinkage is something to note; this is at least the 2nd major retailer to report this as a growing problem, and it will worsen before it gets better. The good news is that Q4 adjusted earnings came in at $1.89 or $0.49 better than expected, which offsets some of the declines. On a YOY basis, earnings are down 40%.

    The guidance is the troubling detail in the report. The company is guiding a range for revenue and earnings so broad as to introduce significant uncertainty into the equation. To finish, the guidance is well below the Marketbeat.com consensus figures at the high end of the ranges, which means Target will have to perform very strongly even to match what the market expects.

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    The bottom line is that Target is due for a revaluation that could start with the analysts.

    h2 The Analyst's Sentiment Toward Target Slipping /h2

    The analyst's sentiment toward Target began to slip at the end of last year and may continue in 2023. No new commentaries have shown up on Marketbeat’s analyst tracking tools yet, which is no surprise given the surprise guidance; it may take them a day or 2 to fully digest the outlook, but the pre-release activity has sentiment and the price target edging lower.

    The analysts have Target pegged at a Moderate Buy with a target at the top of the current trading range. Any downward pressure in the price target will help keep this market moving sideways.

    The post-release action is mixed, the stock has been up and down and flat throughout the morning, but the bias is downward. The 150-day EMA may provide support, but if not, a test of the lower end of the trading range is likely. Strong support is possible near $165, but the firmer targets are near $146 and $140.