Target Corporation (NYSE:TGT) reported third-quarter results that were ahead of consensus, with comparable sales growth of 4.9% and total revenue of $25.4 billion, analysts at Jefferies said as they maintained a ‘Buy’ rating on the big box retailer.
Noting that expectations were low ahead of the results release, the analysts said Target had a “better-than-feared” Q3, highlighted by strong margin and earnings per share (EPS) performance.
Target benefited from an improvement in its gross margin rate to 27.4% from 24.7% a year earlier and disciplined cost management, the analysts noted, as they raised their price target for the stock to $150 from $135.
“Moving forward, 4Q guidance was in line, and we continue to see attractive margin recapture potential,” the analysts wrote in a note to clients.
On Target’s top-line performance, the analysts said the better-than-anticipated performance was likely driven by lower investor expectations alongside growth in frequency categories such as Beauty, partially offsetting continued softness in discretionary categories like Home and Apparel.
The analysts also noted that Target’s inventory levels were well-positioned heading into the holidays.
On the downside, they said comparable food and beverage (F&B) sales were down slightly year-over-year, with management noting that the benefit from average pricing across F&B and Beauty decelerated by roughly 3% from 2Q to 3Q, driven primarily by the lapping of peak inflation.
“While sales mix shift to lower-margin categories is likely to continue, TGT has a clean inventory position and is lapping temporary margin headwinds, which could continue to see margin recapture opportunities,” the analysts concluded.
“Therefore, with expectations reset, margin tailwinds ahead, and valuation below the historical average, we view the shares as attractive.”
Target’s shares traded 0.8% lower at $129.16 on Thursday afternoon. They gained 3.5% on Wednesday following the release of the results.
Contact the author at stephen.gunnion@proactiveinvestors.com