Target Corp.’s markdowns to sell off excess inventory could signal a return to pre-COVID pricing across retail, wrote Raymond James analysts.
Target TGT, -3.16% issued a profit warning on Tuesday that was accompanied by a strategy for reducing a glut of merchandise. In addition to markdowns, the retailer will put price hikes in place, is making adjustments to the supply chain, and more.
Target said it saw a “rapid slowdown” in categories like apparel, home and hardlines during the first quarter, though strength persisted in areas like beauty and food. Too many “bulky” items like televisions and appliances drove promotions during the period.
See: Target’s steps to reduce inventory glut are correct but are a few weeks late, analyst says
Raymond James forecasts more promotions, more discounts across discretionary consumer goods, and a lower margin structure across the sector.
“Today, these trends are being accompanied by record-high inflation levels and lingering macro uncertainty,” wrote analysts led by Bobby Griffin.
“To be clear, we believe these are retail trends and not just Target specific. “
In terms of Target, Raymond James says it has the right strategy, and it will hang on to the market share gains it has made across a variety of categories.
Raymond James rates Target stock strong buy with a $190 price target, down from $205.
BMO Capital Markets also suggested that the challenge goes beyond Target.
“While the abruptness of the change in a short period seemed alarming at first glance, it appears Target is taking more aggressive actions to clear its excess inventory in light of the broader excess inventory across the channel,” wrote Kelly Bania in a note.
“This change does not appear to be reflective of any change in demand/traffic trends and Target re-iterated its outlook for low- to mid-single digital percent revenue growth.”
BMO rates Target stock outperform with a price target of $210.
Also: Target raises dividend by 20%, to boost yield to nearly a percentage point above Walmart’s
Raymond James was one of at least three analyst groups that cut Target’s price target.
“While this is a painful period for Target, taking their medicine (again) in 1Q22 and 2Q22 does set up for a better second half with cleaner inventories,” wrote Michael Baker at D.A. Davidson.
“We think this can set up for a better second half for the stock as well.”
D.A. Davidson rates Target shares buy with a $171 price target, down from $205.
“While the profitability challenges the company experienced in 1Q were expected to linger as Target continued to work through its excess inventory, the headwinds are greater than previously anticipated,” wrote Truist Securities in a note.
“Although sales trends remain solid overall, we expect these operational challenges will remain the focus until we see notable improvements.”
Truist rates Target stock hold with a $150 price target, down from $171.
Target shares rose 0.5% in Wednesday trading. The stock is down 32.3% for the year to date while the broader S&P 500 index SPX, -2.91% is down 13.7% for the period.
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